Partial fulfillment for award of Master of Commerce

-

-

A review of literature on the practise of Information Systems investment appraisal in firms suggests a gap between theory and practice. In an attempt to explore the extent of this gap, this research reviews the theory of fixed asset investment when applied to the current state of practice of IS investment evaluation among Kenyan banking institutions. Results of the survey show that the level of usage of discounted cashflow (DCF) techniques and sophisticated analytical and integrated techniques is low compared to the usage of simple financial and strategic techniques. To illustrate, simple ratio-based techniques were found to be very popular, with Cost Benefit analysis being used by 92% of responding banks, Payback Period (60%) and Return on Investment (60%). Appraisal techniques that consider strategic arguments were also found to be very popular, i.e. technical considerations (92%), competitive advantage (64%) and Critical Success Factors and SWOT analysis (56% each). On the other hand, DCF techniques were unpopular i.e. Net Present Value (8%) and Internal Rate of Return (0%). Further, analytical and integrated appraisal techniques were also found to be relatively unpopular: value analysis (28%), scoring models (16%), computer based techniques (4%), the Balanced Scorecard (56%) and Information Economics (40%). In addition, a partial relationship was found between the adoption of a type of investment appraisal technique and the size of a firm. As the size of the firm, determined by the book value of total assets increases, the usage of strategic and analytical techniques increases, while at the same time, the use of ratio-based techniques reduces. Based on these findings, this study highlights the shortcomings of normative fixed asset investment theory when applied to IS investment appraisal.