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Book Contents

Ch. 12
Evaluating Decision Support Systems Projects

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Research and Development Options Approach

In an article, "Uncovering the Hidden Value in High Risk Investments". David Sharp (1991) proposes a more complex "options" approach.

Options are valuable; they provide the ability to take advantage of certain opportunities at a later time. In real estate terminology, an option is a right purchased for a fee to buy or sell property within a specified time and at a specified price. The value of an option may actually increase with uncertainty and project duration. Options analysis should consider expenditures for both incremental DSS development and maintaining flexibility to build a future DSS. The Research and Development Options Approach has 3 steps:

  1. Identify the options embedded in a given investment. What do we do now incrementally to create future DSS opportunities?
  2. Evaluate the environment and circumstances in which each might be exercised. Under what circumstances may we want to invest more in the proposed DSS?
  3. Evaluate whether the total value of the options outweighs any shortfall in cash flow value from the expenditures; "How much would we be willing to pay now for this future flexibility and opportunity?"

This approach can be difficult to explain to managers and MIS staff. The key issue is expanding DSS opportunities.

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