Roi for It Projects

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Return on Investment Analysis

for E-business Projects

Mark Jeffery, Northwestern University

Introduction

The Information Paradox

Review of Basic Finance

The Time Value of Money

ROI, Internal Rate of Return (IRR),

and Payback Period

Calculating ROI for an E-business Project

Base Case

Incorporating the E-business Project

Incremental Cash Flows and IRR

Uncertainty, Risk, and ROI

Uncertainty

Sensitivity Analysis

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INTRODUCTION

As the late 1990s came to a close, many companies had

invested heavily in Internet, e-business, and information

technology. As the technology bubble burst in 2000 many

executives were asking “Where is the return on investment?” When capital to invest is scarce new e-business

and information technology (IT) projects must show a

good return on investment (ROI) in order to be funded.

This chapter will give the reader the key concepts necessary to understand and calculate ROI for e-business and

IT projects. In addition, the limitations of calculating ROI,

best practices for incorporating uncertainty and risk into

ROI analysis, and the role ROI plays in synchronizing IT

investments with corporate strategy will be discussed.

What is ROI? One conceptual definition is that ROI is a

project’s net output (cost savings and/or new revenue that

results from a project less the total project costs), divided

by the project’s total inputs (total costs), and expressed as

a percentage. The inputs are all of the project costs such

as hardware, software, programmers’ time, external consultants, and training. Therefore if a project has an ROI

of 100%, from this definition the cash benefits out of the

project will be twice as great as the original investment.

(In the section Review of Basic Finance we will discuss

how this definition of ROI,...