What is Custom Software Development

Though IT investments are risky by nature, most of the traditional investment valuation models do not have risk in account, leading to erroneous choices. This chapter bases itself in the dogma that flexibility is the key to handle the uncertainty and risk of the future, and therefore is also a philosophy that must be in the very foundations of IT investments, since IT is the basic foundation of so many businesses. How do we value a risky IT investment is the underlying subject of this chapter. Having the previous dogma as a basis, the authors state that flexibility is a vaccine against risk. As such, this flexibility must have a value. The problem they attempt to solve in this chapter is the quantification of such value. To achieve this goal, the authors propose a real options-based framework to value IT investments, having risk in account.