The ENPV Model Based on Option Theory in IT Investments

Businesses are increasingly relying on information technology (IT) to conduct core business processes. Investments in IT project and IT capabilities enable enterprises to develop competitive advantage. Following the approach to irreversible investments the opportunity of adopting a new uncertain technology can be viewed as representing a real option to the firm. This paper discusses the implications and characteristics of IT investments, then analyzes that the real option is appropriate for evaluating uncertain IT investments. Then we develop a framework which views IT investment opportunities as real options that evaluating the investment value and continually being exercised to achieve both short and long term returns on investment. It is also discussed that the expanded NPV (ENPV) model including the traditional NPV of expected cash flow and the option value of operating and strategic flexibility is an alternative approach that is easier to implement for IT investments in the real world