Introduction While the internet and e-commerce have greatly revolutionized the business environment, the business expenditures on the e-business have also been seeing an increase. The other side of the matter, however, is that the business organizations have to apply economic criteria in their justification of spending on IT-related decisions. Time value of money is a very important aspect of any investment decision made and hence the firms not only consider the impact of internet to their business but they also look at the implications of the decisions they make to invest in the IT-related ventures.
As business faced the turn of the century, spending in the information technology increased by about nine per cent while the following year saw a further increase in the spending by eleven per cent in 2000 (Pisello and Strassmann 2003). Pisello and Strassmann (2003) elaborate further pointing out that those businesses which under- spend on internet-related ventures are no better performers while those that invest more on the IT-related ventures perform better. In addition, spending on internet-related investments calls for even more spending as there is more expenditure required to ensure that the venture is well maintained and well managed for efficiency and effectiveness. Because an investment venture may be beneficial to a business or organization in one of the two ways; cost saving or additional revenue, the paper will attempt to critically analyze ROI in relation to e-business while considering of the two aspects (Pisello 2003). The graph below shows how US businesses’ expenditure on IT –related ventures rose steadily from mid nineties to 2001.
The tremendous increase in the spending between 1999 and 2001 is significant. US Business IT spending from 1995 to 2001 As it can be seen from the graph, investment in the internet, IT and e-business intensified particularly towards the close of the century.
However, the underpinning economic conditions do not allow for funding without considering whether the investment would have a good return on investment or if it would have a detrimental effect on growth, expansion and survival of the business entity. The economy continues to be volatile and the capital that can be invested in any new venture continues to be scarce as well.
This is not withstanding the fact despite all these, spending in e-business by business organizations now clocks trillion of dollars. Businesses have to justify these investment decisions. There are a number of things that a business, while justifying its investment decision, must put into account. First of all, the prevailing uncertainty in business environment must be slotted in. risk is also involved in any decision and hence the businesses attempt to weigh their capabilities to handle the risk that comes with any business investment they make.
After that they have to carry out a sensitivity analysis. Though Return on investment is widely used by businesses as a standard justification for their investment in the internet ventures, the assumptions they make are widely varied. The Time Value of MoneyIf we took an example of two investment options in e-business which we would assume to have the same cost; such that the first venture brings a cost saving benefit or has new revenue amounting to five million dollars for each year for the subsequent 5 years. Assuming that the second project will generate benefits amounting to eleven million dollars at the end of year one and year two of the investment after which it generates nothing and there is capital limitation limiting us to invest only in one particular project out of the two.
Jeffery (2000) notes that in this case we would most probably go for the first option since it would be more appealing than project 2 given that it (project 1) may be argued to have cash flows of $25 M and the second project has only $ 22 M cash flows.
Moreover, we must bear in mind that a dollar today is more than a dollar in the future since it can be used in an investment venture to generate extra interest. Therefore, the rates must be discounted to get the present value of a dollar earned in the future and the future value of a dollar earned today. Hence if we had a series of cash flows, we would discount them to get the present value of the whole cash flow using the equation below.