Bina Nusantara University 3 Introduction Investment in IT expects convincing analysis to justify their proposal Focus on fundamental financial components expected in IT investment decision-making analysis.
Basic Financial Methods The useful life of an IT investment tends is shorter than real assets Capital budgeting techniques are used because IT investment produces benefits beyond one year and its useful life extends into the long-term future Basic financial methods include breakeven analysis, payback period method, and accounting rate of return methodology Simple, easy to calculate, and communicate to others Payback period methodology is the most widely used Bina Nusantara University 4
Breakeven Analysis Involves comparison of quantifiable costs with quantifiable and non-quantifiable benefits of IT Breakeven point is where total value of benefits equals to total costs Benefits > costs = good investment Steps : 1.Calculate the PV of costs 2.Calculate the PV of quantifiable benefits and subtract from PV of costs as net costs 3.Determine if intangible benefits are at least the value of net costs See Table 2 and Table 3 Bina Nusantara University 5
Intangible benefit To determine : –Survey well-informed managers –use a surrogate measure that reflect the actual value Breakeven analysis allows intangible benefits to be considered in the analysis One way to measure or estimate the value of non- quantifiable benefits is through regression analysis Bina Nusantara University 6
Payback Period Payback period of investment is compared to cutoff period Payback period = time required to recover the cost initial investment Cutoff period = time which investment must recover its initial investment Payback period < cutoff period = good investment See Table 6 -Table 9 Bina Nusantara University 7
Accounting Rate of Return ARR is the average annual income from an IT investment divided by average annual book value of the initial investment cost The values appear on the financial statements of an organization Does not consider the time value of money See Table 10 – Table 13. Bina Nusantara University 8