A Better Way to Do ROI Analysis of Software Investments: Part II -- Making DCF More Relevant

by Steven Kursh

There's no need to be dependent solely on discounted cash flow (DCF) when doing ROI analysis of software investments. In this Executive Update, Part II of a two-part series discussing ways to calculate ROI, we offer an alternative to DCF analysis. In contrast to DCF, we should begin to calculate ROI by using a combination of risk-adjusted returns and think about software investments as real options. This approach enables us to consider the flexibility, risks, and changes in projected benefits and costs. Furthermore, it provides a framework for both evaluating and executing investments that will ultimately result in higher ROI and greater value for our companies.