The Application of Real Options to ERP Investment Valuation

This paper discusses the options for adaptability to environmental change inherent in ERP systems, the value of these options, and methods to asses the ERP value. The first point of discussion is the issue of ascertaining the effectiveness of ERP, an underlying asset. We divide the effectiveness into two types-effectiveness in actually generating cash and effectiveness confined to opportunity cost reduction-and propose a method for calculating the ERP value effective in generating cash. The second point of discussion is the valuation of information systems in the context of business acquisition and divestiture. Although business acquisition and divestiture is another unavoidable topic for corporate management, information system valuation has not been discussed in that context. We present a valuation method for the purpose of including information systems in divestment value, something not considered heretofore, to reveal the potential value of information systems in corporate management.