The paper "Does Return on Investments Matter? " is a good example of a finance and accounting coursework. Investment in business means putting up funds in an asset or a fund with the hope of earning some monetary return in the future. These returns can be in the form of capital appreciation, dividends and also interest among other forms of monetary returns. Investments can be done in information technology firms, assets and also industries among other areas that can generate funds. When an investment yields funds for the investor we call the returns or earnings return on Investment and there are a number of techniques that can be used to determine the amount an investor would receive upon making an investment.
All ventures that are started for purposes of providing goods and services for a profit have a value that is attached to them and IT (information technology)is no exception. The value of the business or project is important in determining the rate of return one should expect to get after making an investment into the project or business. This paper is going to look at returns on investments in information technology (IT) and thereafter determine if they matter. How Chief Finance Officers Determine the Value of Information Technology Investments Many businesses have found it difficult to create special techniques for determining the value of information technology investments and they end up using traditional techniques of determining the value of investments that is the capital budgeting techniques such as payback period, internal rate of return discounted cash flow methods as well as return on investments among other techniques.
Information technology experts have responded to the techniques being used to determine the returns of investments in the information technology sector claiming that the techniques are too low.
It has also been noted that very few information technology firms use the return on investment technique to determine the value of an investment in the department. Approaches used to determine the Business Value of Information Technology There are two main approaches that have been used to help in the quest to determine the business value of information technology and these include the variance approach and the process approach. The Variance Approach The variance approach is used to measure the relationship that exists between an IT (information technology) investment and the performance of a business with regards to revenue, costs and market share among other performance factors.
The approach tells us what information technology affects. For a long period of time businesses have been using computers among technologies in their operations, however, when they are drafting and presenting their achievements the computers were not being accredited in the companies’ productivity and the situation led to the statement ‘ IT productivity paradox’ making one wonder what the value of the computers is to the businesses (Davaraj& Kohli, 2002). According to research conducted by researchers and scholars on many businesses in the United States of America, the results on the productivity of computers and information technology on their productivity were mixed.
Some businesses reported that information technology bore zero output to the business while other companies considered the information a major factor in their productivity. For example, Strassmann conducted a research in 1990 on 38 companies in the United States of America, and the result of the research was that there was no correlation between investing in information technology and the performance of the businesses (Dedrick, 2003).
Another research was conducted by Brynnjolfsson and Hitt in 1996 revealed contradicting results from the research conducted by Strassmannthis is because in the 367 firms that were researched they reported an 81% gross return after investing in information technology and the net returns ranged from 48% to 67% (Dedrick, 2003).
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