Other Financial Methodologies Pertemuan 9-12 Matakuliah : A0784 - Strategi Investasi IT Tahun : 2009 Other Financial Methodologies Pertemuan 9-12

Introduction Considered as advanced financial methods Requires knowledge and understanding of time value of money and present value Bina Nusantara University

Types of Methodologies Financial Techniques Operations Research/Management Science Techniques Techniques Specifically Designed for IT Evaluation Other Techniques for IT Evaluation Bina Nusantara University

Financial Techniques Accounting rate of return Breakeven analysis Cost benefit analysis Cost benefit ratio Cost revenue analysis Internal rate of return Net present value analysis Payback period Profitability index Return on investment  See Table 1 Bina Nusantara University

Operations research/management science Analytical hierarchy process Decision analysis Delphi evidence Game playing Multi-objective, multi-criteria approaches Simulation  See Table 2 Bina Nusantara University

Techniques for IT investment Application benchmark technique Benefit/risk analysis Cost-value technique Executive planning for data processing IT assessment Information economics IS investment strategies Investment portfolio Process quality management Return on management Value analysis  See Table 3 Bina Nusantara University

Other techniques for IT investment Balanced score card Cost displacement/avoidance Cost effectiveness analysis Critical success factors Satisfaction/priority surveys Value chain analysis Bina Nusantara University

Present Value Analysis Today’s value of future cash flows of an investment (PV) are compared to the cost of investment NPV is the present value of cash flows minus the initial investment cost If NPV is > 0 = make investment  See Table 5 and Table 6 Bina Nusantara University

Profitability Index A ratio that can be used to rank projects when the size of the initial investment varies for alternative investments. PI = NPV / investment cost  See Table 7-8 Bina Nusantara University

Return On Investment Technique used in capital budgeting decisions where the rate of return of an investment is compared to the opportunity cost of capital Opportunity cost of capital is the expected return omitted by investing in technology rather than in equally risky investment in capital market Return = Profit / investment cost If return > cost  good investment Bina Nusantara University

ROI strategy for Enterprise Resource Planning Align ROI to measure criteria that related to the implementation Assess possibilities for improvement Identify the opportunities for change Capture benefits as early as possible during implementation Pay attention to software modifications Sequence the implementation activities to better capture the benefits Build capturing of benefits into the system by making it a routine part of status reports Bina Nusantara University

Internal Rate of Return Also called discounted cash flow rate of return, is discount rate that makes NPV of project equal zero If IRR > opportunity cost of capital = good investment Problems : may be more than one IRR, opportunity cost of capital may not be equal for each cash flow Bina Nusantara University