Rental software valuation in IT investment decisions

  • Authors:

  • Chaitanya Singh;Roger Shelor;James Jiang;Gary Klein

  • Affiliations:

  • Business and Economics Division, Lyon College, Batesville, AR;College of Business, Copeland Hall, Ohio University, Athens, OH;College of Business Administration, University of Central Florida, Orlando, FL;College of Business and Administration, University of Colorado at Colorado Springs, 1420 Austin Bluffs Parkway, Colorado Springs, CO

  • Venue:
  • Decision Support Systems
  • Year:
  • 2004

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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.