Approximation of NPV for IT investments

Abstract

Companies must be able to adapt and evolve if they wish to survive in the highly competitive marketplace today. Businesses operate with the knowledge that their competitors will inevitably come to the market with a product that changes the basis of competition. The ability to change and adapt therefore is essential to survival. Changes in the technological landscape enable a number of new opportunities to be opened up in the marketplace. There is no need to emphasize the role of Information Technology (IT) in such endeavors. However, great uncertainties surround the IT project landscape where unpredictability of costs as well as quantification of benefits remaining prominent. Although NPV is often used as the de facto standard for IT investment appraisal, calculating the confidence levels of the inputs thereto or the output thereof is not attempted as often as desired. The purpose of this study was to determine how to perform better Net Present Value (NPV) approximations by improving the accuracy of input values thereto, in order to make informed business decisions. The study focuses on finding a practical solution to the above problem than a purist approach towards developing a theory.