Rather than explaining why else I think rewriting a legacy system is generally always the wrong strategy see what Bob Martin, Chad Fowler and Joel Spolsky have to say.

But anyway, what’s this got to do with Real Options analysis and planning? Taking a Real Options approach would very rarely if ever end in the decision to go ahead with a massive rewrite. The calculated risk level to return on investment involved is highly unlikely to be favourable due to the protracted timescale (compared to the incremental addition of features which will be adding value in a short period of time). Also, if you were pursuing multiple options concurrently – aware that one would be dropped once there was a clearer idea of the most appropriate strategy – you’re less likely to get into the situation where you’ve invested so much into one option the momentum and expense (with nothing to show) make it difficult to admit defeat and drop it. With Real Options you’d never put all your eggs in one basket, which is exactly what the “Big Rewrite” does do.

“Real options recognize that today’s investments give investors the choice of pursuing further investments later, if conditions appear favorable, or abandoning the project if the environment has deteriorated. The capital investment made today provides future flexibility that can and must be valued, but is often missed by traditional DCF or ROI measures. Borrowing from both finance and strategy, real options can provide a way to analyze the value of investing in initiatives made under uncertainty.” – Dave Latimer, the Global Financial Services Sector Lead for the Institute for Business Value

Real Options resources:

Wikipedia: Real Options Analysis
“Real Options” Underlie Agile Practices – Chris Matts and Olav Maassen
Calculating value during uncertainty: Getting real with “real options”(pdf) – Dave Latimer
blog.mattwynne.net : My Real Options Story