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5.4Evaluating return on investment
Covers evaluating IT investments with ROI, NPV (discounting future cash flows to present value and subtracting the initial investment), IRR (the discount rate where NPV = 0), the payback method (simple and discounted) measuring the years to recover the investment, and lifecycle TCO; and the ability to interpret numbers to decide which to weight when simple payback and NPV disagree (how time value and post-payback cash flows are treated).
IT investment is a decision to commit management resources, and the strategist must evaluate "whether the investment is worth it" numerically and be able to explain it to management. The representative measures are ROI (the ratio of profit to investment), NPV (discounting future cash flows to present value and subtracting the initial investment), IRR (the discount rate where NPV = 0), and the payback method measuring in how many years the investment is recovered. The key is that each measure differs in "what it sees and what it overlooks." The simple payback period in particular sees only the speed of recovery and ignores time value and post-payback cash flows, so it can disagree with NPV. This section covers how the strategist interprets which numbers, and how, to decide an investment when multiple measures point to different conclusions.
5.4.1The main investment-evaluation measures
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