Rental software valuation in IT investment decisions

Rental software valuation in IT investment decisions

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Article ID: iaor2005969
Country: Netherlands
Volume: 38
Issue: 1
Start Page Number: 115
End Page Number: 130
Publication Date: Oct 2004
Journal: Decision Support Systems
Authors: , , ,
Keywords: capital budgeting
Abstract:

The growth of application service providers (ASPs) is very rapid, leading to a number of options to organizations interested in developing new information technology services. The advantages of an ASP include spreading out payments over a contract period and flexibility in terms of responding to changes in technology. Likewise, newer risks are associated with ASPs, including pricing variability. Some of the more common capital budgeting models may not be appropriate in this volatile marketplace. However, option models allow for many of the quirks to be considered. Modification of the option pricing model and an analytical solution method incorporated into a spreadsheet for decision support are described and illustrated. The analytical tool allows for better decisions compared to traditional value analysis methods which do not fully account for the entry and exit options of the market.

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