TABLE OF CONTENTS After completing this chapter, you should be able to:
Describe "basic financial methods" of IT investment.
Use "breakeven analysis" for IT investment decision-making.
Use "payback period method" for IT investment decision-making.
Use "accounting rate of return" for IT investment decision-making.
Everyone who makes an investment in information technology (IT) will be expected to perform a convincing analysis to justify their proposed investment. In the previous chapters we have focused on many issues that will help begin the preliminary steps in that analysis. This chapter is the first of several chapters focusing on fundamental financial components or the "basic financial methods" expected in IT investment decision-making analysis.
Financial methodologies, in general, are rooted in subject areas of Finance and Accounting, and have been used in traditional "capital budgeting decisions" for many years. Capital budgeting decisions are those concerning investment in real assets, e.g., machinery, facilities, management expertise and information technology. Real assets tend to be long-lived assets, meaning they will be used for a long period of time, often several years. However, the useful life of an IT investment tends to be shorter than that of the typical real asset (e.g., a facility or piece of machinery is often used for several decades where as information system may become obsolete in two to three years). Capital budgeting techniques are commonly used in IT investment...
