Systems Analysis & Design

7th Edition

Systems Analysis & Design

7th Edition

Toolkit 3

22

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

33

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

1. No charge method• Cost center

2. Fixed charge method• Profit center

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Describing Costs and Benefits

Managing Information Systems Costs and Changes

3. Variable charge method based on resource usage• Resource allocation

• Connect time

• Server processing time

4. 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 steps1. Determine the initial development cost of the

system

2. Estimate annual benefits

3. Determine annual operating costs

4. Find the payback period

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Cost-Benefit Analysis

Payback Analysis

– Economically useful life

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Cost-Benefit Analysis

Payback Analysis

– Some managers are critical of it because it places all the emphasis on early costs and benefits and ignores the benefits received after the payback period

– Even with its drawbacks, payback analysis is a widely used tool

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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 (one for costs and one for benefits)

– 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