Evaluation and analysis of complex information technology projects with the approach of analyzing real options

Number of pages: 107 File Format: Not Specified File Code: 29545
Year: Not Specified University Degree: Not Specified Category: Industrial Engineering
  • Part of the Content
  • Contents & Resources
  • Summary of Evaluation and analysis of complex information technology projects with the approach of analyzing real options

    Master's Thesis

    Industrial Engineering - System Management and Productivity Orientation

    Fall 92

     

    Abstract:

    The growing and rapid movement of today's societies to acquire and exploit information has led to the increasing implementation of various projects in the field of information technology (IT) at the organizational and national levels. Due to the remarkable speed of technological innovations, information technology projects (especially software projects) face many challenges and risks. The current research method is applied in terms of purpose, data collection tool, questionnaire and statistical community, experts in the field of information technology. In this research, by identifying the risk factors and options available in the project, the relationship between the strategy adopted by managers with information technology experience to manage various risks with the actual options available in the project has been investigated. The results of the findings showed that in most cases there was a strong correlation between the existing option-risk pair. Also, in this research, the real options method has been used to evaluate the investment of the ERP project, taking into account the two options of expansion and downsizing of the project. The results of the findings showed that in the method of real options, considering the flexibility in management, that is, considering the options that can be applied in the project, the estimated value was different from the estimated value using the DCF method. because in  Analyzing the results of the expansion option valuation, the current value of the asset for current operations is estimated at 199.8 million Tomans. If the operation is expanded today, the asset value is equal to 308.6568 million Tomans  will be estimated. This amount is greater than the value of the asset without exercising the expansion option. As a result, the exercise of the expansion option will bring an additional value equal to 188.85 million Tomans. Also, the analysis of the valuation results of the downsizing option has shown that the value of exercising the downsizing option using the real options method is equal to 118.273 million Tomans. As a result, applying the downsizing option will not have additional value for the project. Therefore, this project has no room for downsizing. Finally, through the valuation of the option, the choice of the option that contains the maximum value for the asset has been considered, and finally a strategic plan for the project has been considered during one year of the option's life.

    Keyword: real options,   investment, information technology, risk management

    Chapter one:

    Research overview

     

     

    1-1- Introduction:

    The growing and rapid movement that today's societies show to obtain more and more information has led to the increasing implementation of various projects in the fields of information technology at the organizational and national levels. Information technology investment provides several potential advantages for organizations, however, unfortunately, the productivity gains from information technology investments may be neutral or even negative due to the high risk associated with information technology projects (Arthur, 1994). Traditionally, information technology (IT) managers use classic investment analysis methods such as net present value[1] to select projects. Classical decision-making frameworks for selecting information technology (IT) projects use specific and static values ??to estimate project costs and benefits, and as a result, the effect of uncertainty is generally ignored. Considering the increasing innovations in the field of information technology, the importance of including uncertainty in the investment decisions of this technology is revealed. The purpose of this research is to introduce RO analysis [2] as a superior technique for decision making in the investment of information technology projects. This is a new technical method for investment valuation, which on the one hand does not have the limitations of previous methods, and on the other hand, it has high flexibility, which allows the use of choices for investment management. Therefore, this research is about the application of real options theory in the evaluation of information technology investment opportunities and also introduces the real options theory as an up-to-date and applicable approach in economic analysis.

    1-2- Statement of the problem

    The rapid growth of information technology (IT) investment has put pressure on the management sector to consider the risks and returns in their investments in their decisions (Kim & Yong, 2002). To reduce risk, decision makers should be allowed to change investment decisions whenever new information on prices, costs, and other market conditions becomes available. This is the main concept of flexibility in the field of investment funds, and allows organizations to use real options valuation in IT investment. Due to the highly uncertain nature of IT investment, real options evaluation has been proposed by information systems (IS) researchers as a method to understand and facilitate investment decisions (Kumar, 1986).

    Although real options theory is a promising method for IT investment evaluation, the lack of knowledge about real options prevents managers from using this prominent method to evaluate their investments (Busby, 1997).

    This research about The application of the theory of real options is in the evaluation of investment opportunities of information technology, and it also introduces the theory of real options as an up-to-date and applicable approach in economic analysis. This is a new technical method for investment valuation, which due to its high flexibility allows the use of choices in front of investment management, even when the expected economic value is less than zero, organizations eagerly decide to invest in a specific technology. 3-1 Research Necessity Considering the conditions of our country and being in transition from a semi-developed state to a developed one, the conditions of sanctions  International, which makes the situation of big plans even more complicated and difficult to perform this type of analysis, which is a new approach at the international level for economic analysis, taking into account the risk-generating factors, and it is essential for experts in the economic analysis department to get to know it in depth. This theory has become an issue while currently in Iran, apart from a few university researches and scattered educational institutions, there is no coherent and organized academic effort to apply this theory. In this research, it has been tried to maintain the spirit of innovation in the field of research as much as possible and as much as possible, since the theory of options is creating a revolution in the world of economic evaluation of projects, it seems very necessary to apply it in the evaluation of projects in the field of information technology.

    This  The thesis is an effort towards this deep need and while introducing this approach and expressing some shortcomings and ambiguities in it and trying to remove these ambiguities, it also tries to pay attention to practical cases of the application of this approach. that ERP systems implementation projects have been selected as the subject of study. 1-4-2- partial objectives 1.  Identifying the risks of information technology projects.

    2. Identifying real flexibilities and options to reduce identified risks so as to create value for investment. 3. Examining the learning of the theory of real authority and its expression in a scientific way.

    4. Organization and classification of studies conducted in the field of application of real powers in information technology projects. 1-5-5 research questions 1. Are the theory of real powers that are designed according to the complexity and uncertainty governing the organizations as well as the necessary managerial flexibility effective in the analysis of plans in the field of information technology? 2. Based on the theory of real options, how can investments in the field of information technology be designed and managed in a way that is in line with the organization's strategy?

    1-6- Research variables:

    1-6-1- Independent variable:

    The independent variable is risk factors, where the value of each risk index is a numerical value between 0 and 10 (zero means no risk and 10 means extreme risk) above).

    1-6-2- Dependent variable:

    The dependent variable in this research  There are options. If the option exists in a project, its value is equal to 1, otherwise it is zero

  • Contents & References of Evaluation and analysis of complex information technology projects with the approach of analyzing real options

    Chapter 1: General research

    1-1 Introduction: 2

    1-2 statement of the problem. 2

    1-3 Necessity of research. 3

    1-4 research objectives. 3

    1-4-1 general objectives. 3

    1-4-2 minor objectives. 3

    1-5 research questions. 4

    1-6 research variables: 4

    1-6-1 independent variable: 4

    1-6-2 dependent variable: 4

    1-7 research assumptions: 4

    1-8 research data collection method. 4

    1-9 scope of research. 5

    1-9-1 The spatial territory of the research. 5

    1-9-2 Time domain of research. 5

    1-9-3 Subject area of ??research. 5

    1-10 applied aspects of research. 5

    1-11 research innovation. 5

    1-12 key words and operational definition of words: 5

    1-13 Summary: 6

    Chapter Two: Literature and Research Background

    2-1 Introduction. 8

    2-2 Theory of financial options. 8

    2-2-1 Definitions: (1973, Black& Scholes. 10

    2-3 Analysis of real options. 10

    2-3-1 Real options versus financial options. 13

    2-4 Types of options: 14

    2-4-1 Simple options. 14

    2-4-2 Compound options. 16

    2-5 methods of valuation of real options. 17

    2-5-1-Scholes equation. 20

    2-5-1-2 Advantages and limitations of the 2-5-2 Scholes equation. 22-5-2 advantages and limitations of the 2-5-2 model Black-Scholes method. 2-5-3. Monte Carlo simulation. 2-6. How to estimate them. 2-6-1 Asset value. 26

    2-6-2-1 What is changeability? 27

    2-6-2-1-1 Variability estimation methods: 27

    2-6-3 option price. 27

    2-6-4 lifetime of option. 28

    2-6-5 Number of time intervals. 28

    2-7 Authority and uncertainty. 28

    2-8 Comparison of real options with decision tree. 31

    2-9 When is the analysis of real options more valuable? 31

    2-11 Investment. 32

    2-12 Complexity. 33

    2-13 IT project implementation patterns. 33

    2-14 traditional methods of investment evaluation. 35

    2-15 Risk analysis of information technology investments. 36

    2-16 special features of IT investments. 37

    2-17 Deficiencies of traditional methods for assessing the risk of investment in information technology. 38

    2-18 Factors determining the value of real options in IT investment. 39

    2-19 Nested Options Model: 39

    2-20 The Real Options Method and IT Investment Decisions: 39

    2-21 ROT Criticisms and Defenses. 40

    2-22 Research Background: 41

    2-23 Options used for each of IT investment risks in past research. 46

    2-24 Summary: 49

    Chapter Three: Research Method

    3-1 Introduction. 51

    3-2 research method. 51

    3-3 research objective. 53

    3-3-1 General objectives. 53

    3-3-2 minor objectives. 53

    3-3-3 Assumptions of the research: 53

    3-5 Society and statistical sample of the research. 53

    6-3 methods of research data collection. 54

    3-7 Information gathering tool in this research: 54

    3-7-1 Guide form: 54

    3-7-2 Questionnaire: 56

    3-7-2-1 Questionnaire design steps. 57

    3-8 library studies: 58

    3-9 summary: 58

    Chapter four: information analysis

    4-2 information analysis method. 61

    4-2-1 Results of descriptive findings: 61

    4-2-2 Regression analysis: 63

    4-2-3 Results of findings from the open question of the questionnaire: 65

    4-3 Stage technique based on Real Options for ERP project investment: 68

    4-3-1 Evaluation of ERP project using research model: 68

    4-4 Valuation of options considered in the project using the binomial tree method. 69

    4-4-1 Definition of input parameters. 69

    4-4-2 Calculating investment benefits and costs. 69

    4-4-3 Investment evaluation with NPV method. 70

    4-5 Calculating the parameters of building a binomial tree. 71

    4-5-1 Constructing a binomial tree and calculating the expected value at each node of the tree. 71

    4-5-2 Valuation of option expansion: 71

    4-5-3 Valuation of options. 73

    4-5-3-1 Calculating the node value with regression method: 73

    4-5-4 Analysis of the valuation results of expansion option. 74

    4-6 valuation of downsizing option. 74

    4-6-1 Analysis of the results of the downsizing option valuation. 77

    4-7 Option valuation. 77

    4-7-1 Analysis of option valuation results. 78

    4-8 Comparison of the results of discounted cash flow analysis and real options method. 79

    Chapter Five: Conclusions and Suggestions

    5-1 Introduction. 82

    5-2 Summary: 82

    5-3 Answers to research questions: 83

    5-4 Research findings: 84

    5-5 limitations‏ and the shortcomings of previous research. 84

    5-6 Innovations and main advantages of research. 85

    5-7 limitations of conducting research. 85

    5-8 suggestions for future research. 86

    5-8 suggestions for the company: 86

    Sources and sources:

    Sources and sources.. 89

    Appendices.. 95

    List of tables:

    Table 2-1 four types of basic financial options based on Andersen, 2002)). 9

    Table 2-2 Differences between options in financial transactions and real options (Rivey, 2007. 12

    Table 2-3 Correspondence between options theory variables and real options theory (Dias, 2004). 13

    Table 2-4 shows the Black and Schulz formula for determining the value of a call option. 18

    Table 2-5 of the modified Dos Santos equation. 21

    Table 2-6 of the efficiency of options in dealing with different problem conditions 47 Table 2-9 Sources Table 3-1 Guide to the use of each option 57 Table 4-1 Selection of identified risks Table 4-2 64

    Table 4-3 introducing the types of options for risk management of information technology investment in the studied company. 66

    Table 4-4 input parameters in the real option valuation model. 69

    Table 4-5 assumptions necessary for investment. 70

    Table 4-6 NPV calculation for ERP project. 70

Evaluation and analysis of complex information technology projects with the approach of analyzing real options