Deck 14: The Value of IT

Question 1

EVA is an extension of the residual income technique.

Answer 1

True

Question 2

A limitation of real options is that there is no option to defer an investment until some future time.

Answer 2

False

Question 3

Activity based costing (ABC) is a valuation method that primarily uses scientific and mathematical methods to evaluate the IT investment process.

Answer 3

False

Question 4

Which of the following best describes an approach used in capital budgeting where the ratio of present value of the inflows to the present value of the outflow, including the interest earned during the deferral period?

A) Modified NPV
B) NPV
C) EVA
D) Real options

Question 5

A difference between standard NPV and modified NPV is that the standard NPV includes the interest earned during the deferral period.

Question 6

A strength of ROI is that it looks at both the tangible and intangible value of IT investments.

Question 7

The "tomato garden" is a framework that depicts two elements of value provided by a real option, as represented by a project's cumulative volatility and its ROI.

Question 8

The value management framework looks at business processes and expected outcomes, and how IT can enable them.

Question 9

The balanced scorecard methodology integrates traditional financial measures with customer perspectives, internal business processes and organizational growth, and learning and innovation.

Question 10

Portfolio management is concerned with managing IT assets from an investment perspective by calculating risks, yields, and benefits.

Question 11

Which of the following best describes an approach used in capital budgeting where the present value of cash outflow is subtracted from the present value of cash inflows?

A) Modified NPV
B) NPV
C) EVA
D) Real options

Question 12

Which of the following financial approaches uses recent developments in corporate finance, especially the capital asset pricing model, to identify the cost of capital for a specific division or business unit, while attempting to remove distortions created by the GAAP?

A) Modified NPV
B) Residual income
C) EVA
D) Real options

Question 13

Which of the following best describes a technique for assessing the value of IT investments which calculates net earnings from operations divided by net assets?

A) Modified NPV
B) NPV
C) EVA
D) ROI

Question 14

A strength of real options is that they reduce risk by permitting deferral of a final commitment of funds until long-term projects have reduced their uncertainty.

Question 15

A strongpoint of discounted cash flow analyses, such as ROI and residual income, is that they are good for valuing strategic investment proposals having dynamic, strategic characteristics.

Question 16

Residual income is calculated as the difference between reported operating income and the financial opportunity cost of the investment base.

Question 17

The EVA method attempts to remove distortions to the investment decision that are created by GAAP.

Question 18

The use of the ROI method has often led to its manipulation by managers attempting to show enhanced short-term results.

Question 19

Which of the following best describes a technique for assessing the value of investments which measures the difference between a division's (or other activity's) reported income and the financial opportunity cost of the division's investment base?

A) ROI
B) Residual income
C) EVA
D) Real options

Question 20

A limitation of decision tree analysis is that it does not require analysis of options available to managers to amend their strategic plans as they unfold over time.

Question 21

Each of the following is considered a limitation of the real options model of investment valuation except:

A) the model is based on cash flow projections, rather than any intangibles.
B) cumulative volatility adds an explicit incorporation of uncertainty into the model.
C) the risk exposures are increased relative to other valuation models.
D) the complexity of the model may act as a deterrent to IT managers from using it.

Question 22

The methodology that calculates "true" economic profit by subtracting the cost of all capital invested in an enterprise including the technology-from net operating profit best describes_________

Question 23

The accounting principles that are the generally accepted practices for an organization to report their financial information outside of the firm are referred to as_________

Question 24

According to Buss, each of the following is considered an intangible benefit except:

A) improving client service.
B) speeding up decision making.
C) standardizing manual processes.
D) residual income.

Question 25

Which of the following best describes a measure that determines the total costs associated with the acquisition and subsequent use of a given item or service from a given supplier?

A) TBO
B) TCO
C) ABC
D) ABM

Question 26

Which of the following best describes an IT investment approach which provides an alternative to defer an investment until some future time?

A) Modified NPV
B) NPV
C) EVA
D) Real options

Question 27

Which of the following best describes a methodology that integrates traditional financial measures with customer perspectives, internal business processes and organizational growth, and learning and innovation?

A) Applied information economics
B) Balanced scorecard
C) Economic value added
D) Portfolio management

Question 28

The management of IT assets from an investment perspective by calculating risks, yields, and benefits best describes_________

Question 29

The call option that can be exercised only at the date of expiration is referred to as a(n)_________

Question 30

A measure that considers the benefits of competing products or processes instead of just focusing on their individual costs best describes_________

Question 31

A technique capable of accounting for a firm's revisions of its strategies and operations under uncertainty best describes a(n)_________

Question 32

Which of the following best describes a measure that considers the benefits of competing products or processes?

A) TBO
B) TCO
C) ABC
D) ABM

Question 33

Which of the following best describes a technique capable of accounting for a firm's revisions of its strategies and operations under uncertainty?

A) NPV
B) DTA
C) EVA
D) Real options

Question 34

A methodology that integrates traditional financial measures with customer perspectives, internal business processes and organizational growth, and learning and innovation best describes the_________

Question 35

_________is a development technique that breaks projects down into smaller (three to six month) deliverables, ideal for taking advantage of the real option valuation approach.

Question 36

The expressions for the modified NPV and cumulative volatility permit the valuation of a European call option using the_________ for options valuation.

Question 37

Which of the following best describes a methodology that informs managers what the real cost of processes are and provides a basis of maximizing profit by encouraging profitable processes and discouraging unprofitable ones?

A) Value management framework
B) Total cost of ownership
C) Performance measurement
D) Activity-based management

Question 38

The framework which depicts two elements of value provided by a real option, as represented by a project's cumulative volatility and its modified NPV, best describes:

A) a "tomato garden" approach.
B) the investment portfolio approach.
C) the Black-Scholes model.
D) the European call option.

Question 39

Which of the following best describes a methodology that measures the cost and performance of activities, resources, and cost objects?

A) Value management framework
B) Total benefit of ownership
C) Performance measurement
D) Activity-based costing

Question 40

_________is an approach used in capital budgeting where the present value of cash outflow is subtracted from the present value of cash inflows.

Question 41

The method that evaluates intangible costs, benefits, and risks as complements to financial valuation results is best described as _________

Question 42

Briefly describe the methodology of portfolio valuation and its strengths and weaknesses.

Question 43

Uncertainty is measured in real options analysis as the_________ of the investment's future value.

Question 44

Briefly describe the methodology of real options and its strengths and weaknesses.

Question 45

Explain the limitations of traditional financial approaches to assessing the value of IT.

Question 46

A methodology that quantifies the dollar values of risk and time and adds these into the valuation equation is best described as_________

Question 47

A methodology that informs managers what the real cost of processes are and provides a basis of maximizing profit by encouraging profitable processes and discouraging unprofitable ones is best described as_________

Question 48

The framework that looks at business processes and expected outcomes and how IT can enable them is best described as the_________

Question 49

Briefly describe the methodology of information economics and its strengths and weaknesses.

Question 50

Explain a key limitation of using ROI whereby division managers manipulate the ratio in an attempt to show enhanced short-term results.