9.1 Introduction

Having decided the direction of the firm's IT investment at a business level through the development of a macro model and a meso model, it is then necessary to perform some detailed analysis of the financial impact the proposed investment is likely to have on the organisation. This has been referred to as the micro model in Chapter 4 and usually implies the conducting of a detailed financial study that involves business case accounting or cost-benefit analysis.

9.2 Basic approach

The techniques used for this type of analysis include capital investment appraisal, which involve the calculation of financial ratios such as the payback, the return on investment (ROI), the net present value (NPV) and the internal rate of return (IRR). ^[1]

It is normal practice not to just produce one financial statement or micro model but rather to produce several different scenarios or financial pictures. However sometimes there is only one IT investment being offered and if this is the case then it is advantageous to produce a financial statement showing what the situation would look like if no action is taken and the status quo is maintained.

In addition to this what-if ^[2] analysis showing what will happen if some of the assumptions are not realised should accompany...