The Research On Real Option Theory Applied To Information Technology Investment Evaluation

The information technology (IT/IS) investment evaluation is of much importance for companies and therefore has been studied for many years. However, there has not an completely effective solution to the issue. This study endeavors to provide a macro-view of the evaluation of an IT/IS investment so as to support decision-makers to grasp the 'right' insight of the IT investment and make 'rational' decisions.Most real world IT/IS investments are characterized by infrastructure and can be implemented phase by phase. In addition, 'wait-to-see' offers decision-maker managerial flexibilities as well as new investment opportunities. Given the distinctiveness of IT/IS project, it is justified that real options thinking can be adopted for the evaluation of IT/IS investment.This thesis analyzes the ineffectiveness of traditional evaluation methods and furthermore proposes a new IT/IS project investment evaluation method. In addition, this study also apply the extended BLACK-SCHOLES real option pricing model to take the estimation errors into consideration. In the end, the new method is applied to a realistic case to justify the effectiveness and testify the influence of the estimation errors.This study analyze the source of uncertainty in IT/IS investment, and identify the managerial flexibility which is dedicated to reduce the risk. The extended B-S pricing model is applied to evaluate the value of the IT/IS project including the value of managerial flexibility. Sensitivity analysis of the critical parameters shows decision-maker the reasonable investment plan. Since most authors in the IS literature have made their cases using illustrative, rather than actual real world examples, and have always concluded with caveats and questions for future research about the applicability of such methods in practice, this study make a deep research into the cost-benefit of a real world IT/IS project investment and evaluate it using traditional DCF method and the method proposed in this thesis respectively.There are mainly three contributions this study makes:â‘ it provides a framework within which the appropriateness of using real options theory in IT/IS investment evaluation is systematically justified. Moreover, it presents the application of the extended Black-Scholes model that uses a real world e-business situation as its test bed to confirm the effects of the estimate errors;â‘¡it apply the extended Black-Scholes model with consideration to the estimation errors that are ubiquitously inevitable in a real option analysis;â‘¢it use a realistic IT/IS case to test the analysis framework proposed by this thesis.