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Systems Analysis and Design 8th Edition
Toolkit 3
Financial Analysis Tools
Toolkit Objectives
• Define economic feasibility
• Classify costs and benefits into various categories, including tangible or intangible, direct or indirect, fixed or variable, and developmental or operational
• Understand chargeback methods and how they are used
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Toolkit Objectives
• Use payback analysis to calculate the length of time that it takes for a project to pay for itself
• Use return on investment analysis to measure a project’s profitability
• Use present value analysis to determine the value of a future project measured in current dollars
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Introduction
• You need to know how to calculate costs and benefits when you conduct preliminary investigations, evaluate IT projects, and make recommendations to management
• Financial analysis tools are important throughout the systems development life cycle
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Describing Costs and Benefits
• Economic feasibility
• Total cost of ownership (TCO)
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Describing Costs and Benefits
• Cost Classifications
– Tangible costs
– Intangible costs
– Direct costs
– Indirect costs or overhead expenses
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Describing Costs and Benefits
• Cost Classifications
– Fixed costs
– Variable costs
– Developmental costs
– Operational costs
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Describing Costs and Benefits
• Managing Information Systems Costs and Changes
– Chargeback method
– No charge method
• Cost center
– Fixed charge method
• Profit center
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Describing Costs and Benefits
• Managing Information Systems Costs and Changes
– Variable charge method based on resource usage
• Resource allocation
• Connect time
• Server processing time
– Variable charge method based on volume
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Describing Costs and Benefits
• Benefit Classification
– You must classify the benefits that the company expects from a project
– Like costs, benefits can be classified as tangible or intangible, fixed or variable, and direct or indirect
– Positive benefits
– Cost-avoidance benefits
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Cost-Benefit Analysis
• Cost-benefit analysis
• Many cost-benefit analysis techniques exist
• Three most common methods: payback analysis, return on investment analysis, and present value analysis
• The objective is the same: to provide reliable information for making decisions
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Cost-Benefit Analysis
• Payback Analysis
– Payback period
– Carry out the following steps
• Determine the initial development cost of the system
• Estimate annual benefits
• Determine annual operating costs
• Find the payback period
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Cost-Benefit Analysis
• Payback Analysis
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Cost-Benefit Analysis
• Payback Analysis
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Cost-Benefit Analysis
• Using a Spreadsheet to Compute Payback Analysis
– First step is to design the worksheet and label the rows and columns
– After entering the cost and benefit data for each year, you enter the formulas
– You will need a formula to display cumulative totals, year by year
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Cost-Benefit Analysis
• Return on Investment Analysis
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Cost-Benefit Analysis
• Using a Spreadsheet to Compute ROI
– Use cumulative columns but you also will need two overall totals
– The last step is to add a formula to calculate the ROI percentage rate
– If your data changes, you can modify your worksheet and calculate a new result instantly
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Cost-Benefit Analysis
• Present Value Analysis
– Time value of money
– Present value analysis
– Present value
– Present value tables
– Net present value (NPV)
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Cost-Benefit Analysis
• Present Value Analysis
– In theory, any project with a positive NPV is economically feasible
– Can also be used to compare and rank projects
– Provides solutions to the shortcomings of payback analysis and return on investment analysis
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Cost-Benefit Analysis
• Using a Spreadsheet to Calculate Present Value
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Toolkit Summary
• Must be concerned with economic feasibility throughout the SDLC
• Must classify project costs as tangible or intangible, direct or indirect, fixed or variable, and developmental or operational
• Every company must decide how to charge or allocate information systems costs and the chargeback method
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Toolkit Summary
• You must also classify system benefits
• Present value analysis adjusts the value of future costs and benefits to account for the time value of money
• Many companies use present value analysis to evaluate and rank projects
• Toolkit 3 complete
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