Feasibility and Cost Analysis

 Define economic feasibility

 Identify the cost considerations that analysts
consider throughout the SDLC
 Understand chargeback methods and how
they are used
 Use cost-benefit analysis, payback analysis,
return on investment analysis, and present
value analysis
 A project is economically feasible if the future
benefits outweigh the costs

 Cost-benefit analysis is performed when

◦ Conducting a preliminary investigation
◦ Evaluating a project
◦ Making recommendations to management
 Cost classifications
◦ Costs can be classified in several ways
 Tangible and intangible costs
 Direct and indirect costs
 Fixed and variable costs
 Developmental and operational costs
 Direct and indirect costs
◦ Direct costs are those that can be associated with
the development of a specific system
 Examples: project team salaries, new hardware or
software needed for the system
◦ Indirect costs, or overhead expenses, cannot be
attributed to a particular system
 Examples: network administrator’s salary, copy
machine rental costs
 Fixed and variable costs
◦ Fixed costs are relatively constant and do not
depend on a level of activity or effort
 Examples: salaries, rental charges
◦ Variable costs depend on the level of activity
 Examples: printer paper, supplies, telephone line
charges
 Developmental and operational costs
◦ Development costs are incurred only once, at the
time the system is developed
 Examples: system development team salaries, user
training, hardware purchase
◦ Operational costs are incurred after the system is
implemented and continue while the system is in
use
 Examples: system maintenance, ongoing training,
annual license fees
 Managing information systems costs and
charges
◦ Management requires cost information
◦ Direct costs can be associated with a specific
system, while indirect costs must be allocated
◦ A chargeback method uses accounting entries to
allocate the indirect IS costs
 No charge method
 Fixed charge method
 Variable charge method based on resource use
 Variable charge method based on volumes
 Managing information systems costs and
charges
◦ Chargeback methods
 No charge method
 Treats IS department indirect expenses as a necessary
cost of doing business, which benefits the entire company
 The IS group is called a cost center because it generates
no offsetting credits for services performed
 User departments are not charged for indirect IS expenses
 Managing information systems costs and
charges
◦ Chargeback methods
 Fixed charge method
 Indirect IS costs are divided among all other departments
in the form of a fixed monthly charge, using various
formulas

 User departments are charged with a fixed share of

indirect IS expenses
 Managing information systems costs and
charges
◦ Chargeback methods
 Variable charge method based on resource use
 Resources might include CPU time, connect time to a
remote computer, communication lines or printers
required
 Costs can vary from month to month

 User departments are charged with indirect IS expenses

on the basis of resources used
 Managing information systems costs and
charges
◦ Chargeback methods
 Variable charge method based on volume
 Resources might include CPU time, connect time to a
remote computer, communication lines or printers
required
 Costs can vary from month to month
 In this method, the IS group is called a profit center
 User departments are charged with indirect IS expenses
on the basis of resources used
 Benefit classifications
◦ Benefits can be classified into the same categories
as costs
 Tangible and intangible benefits
 Direct and indirect benefits
 Fixed and variable benefits
 Developmental and operational benefits
◦ Benefits also can be classified as positive benefits
and cost-avoidance benefits
 Positive and cost-avoidance benefits
◦ Positive benefits are a direct result of the new
information system
 Examples: increased revenues, improved services,
higher morale, better management
◦ Cost-avoidance benefits refer to expenses that
would be necessary if the new system is not
installed
 Examples: handling work with current staff instead of
hiring, not having to replace hardware or software
 Cost-benefit analysis is the process of
comparing anticipated costs to anticipated
benefits
 Cost-benefit analysis produces reliable
information for making decisions
 Common cost-benefit techniques
◦ Payback analysis
◦ Return on investment (ROI) analysis
◦ Present value analysis
 Payback analysis
◦ Payback analysis is the process of determining how
long it takes for an information system, to pay for
itself
◦ Four step process
1. Determine the system’s initial development cost
2. Estimate annual benefits
3. Determine annual operating costs
4. Find the payback period by comparing total costs to
accumulated benefits
 Payback analysis
◦ When costs and benefits are plotted, the
economically useful life of the system is shown
◦ Systems development costs are high at first, then
drop
◦ Systems operation costs remain low until increased
maintenance is required toward the end of the
system’s economically useful life
 Payback analysis
◦ When costs are plotted, the economically useful life
of the system is shown
◦ Systems development costs are high at first, then
drop
◦ Operational costs remain low at first, then increase
as more maintenance is required
◦ Benefits usually increase rapidly when the system
becomes operational, then level off
 Payback analysis
◦ When costs and benefits are plotted on the same
graph, the payback period is illustrated
◦ Note that the payback period is not the point where
the current benefits equal current costs
◦ The payback period is the point where accumulated
benefits equal accumulated costs
 Payback analysis
◦ Pros and cons
 Payback analysis emphasizes costs and benefits early
in the system’s life and ignores those that occur later
 Even though it has drawbacks, payback analysis is
widely used
 Using a spreadsheet to compute payback
analysis
◦ Design the spreadsheet and label the rows and
columns
◦ Enter the cost and benefit data for each year
◦ Enter the formulas to calculate cumulative costs and
benefits
 Return on investment analysis
◦ ROI is a percentage rate that measures profitability
by comparing a project’s total net benefits (the
return) to its total costs (the investment)
◦ ROI = (total benefits - total costs) / total costs
◦ Projects can be ranked using ROI
 Return on investment analysis
◦ Pros and cons
 ROI does consider all costs and benefits during the
system’s life, and is a more precise method than
payback analysis
 ROI only measures the overall rate of return for the
total period, and annual rates can vary considerably
 ROI ignores the timing of costs and benefits
 Using a spreadsheet to compute ROI
◦ Set up the worksheet and enter cost and benefit
data
◦ Overall cost and benefit totals are required
◦ Add a formula to calculate ROI, which is total
benefits minus total costs, divided by total costs
 Present value analysis
◦ The time value of money is a concept that adjusts
future costs and benefits and expresses them in
terms of current Rupees
◦ The timing of costs and benefits directly affects the
desirability of a project
 Benefits that you receive now are more valuable than
those you receive in the future, because you gain the
use of the money and can invest it
 Costs that you incur now are more expensive than
those you incur in the future, because you lose the use
of the money immediately
 Present value analysis
◦ Present value adjustment factors are based on a
specified interest rate called the discount rate
◦ The discount rate is the return a company might
expect on a risk-free investment, such as a bond
◦ Each company determines its own acceptable rate
of return for an information systems project
◦ Adjustment factors are printed in tables called
present value tables, which are readily available
 Present value analysis
1. Use present value tables to time-adjust values
 Locate the adjustment factor in the column with the
appropriate discount rate and the row for the
appropriate number of years
 Multiply this value times the costs and benefits to
calculate the adjusted cost and benefit values
 Present value analysis
1. Use present value tables to time-adjust values
 Locate the adjustment factor in the column with the
appropriate discount rate and the row for the
appropriate number of years
 Multiply this value times the costs and benefits to
calculate the adjusted cost and benefit values
2. Total the time-adjust costs and benefits
3. The net present value (NPV) is total benefits minus
total costs
 Present value analysis
◦ Pros and cons
 Present value analysis not only considers all costs and
benefits, but adjusts the values based on timing
 NPV results depend on future estimates, and are only
as reliable as the forecasts themselves
 Many companies use all three methods to evaluate
projects
 Using a spreadsheet to calculate present
value
◦ Set up the worksheet and enter costs, benefits, and
present value adjustment factors
◦ Provide cost and benefit totals
◦ Add formulas to multiply each cost and benefit
value times the appropriate adjustment factor
◦ Add a formula to calculate net present value (NPV),
which is total adjusted benefits minus total
adjusted costs
Qualitative Analysis :
 Qualitative analysis determine the quality
improvement in the organization.
 You can not measure qualitative aspects.
 What are the qualitative Aspects improved in
the organization ??????
Quantitative Analysis :

Quantitative benefits are those which can be

easily measured in term of rupees or quantity.

What are quantitative benefits are losses ???