An integrated real options evaluating model for information technology projects under multiple risks

Information technology (IT) investments are exposed to multiple sources of risks. Past information systems research on real options evaluation could not deal with a mix of public and private risks sufficiently in the valuation procedures. Moreover, the relationship between IT investment value and risk factors has rarely been fully explored and remains debatable. In this light, we present an approach based on real options to evaluate IT investments subject to multiple risks. By modeling public risks and private risks in different ways, this approach produces some new results that are different from prior researches. It is found that public risk has an upward effect on the expected payoffs, while private risk influences the options value in a contrary way. The suggested method could help IT managers produce a well-structured valuation process in IT investment decision-making, and understand the interactions between IT risks and options value in a clear way. We also illustrate how the proposed procedure is applied to an ERP project in a construction company. © 2009 Elsevier Ltd and IPMA.