the systems analysis toolkit feasibility and cost analysis tools
TRANSCRIPT
The Systems Analysis Toolkit
Feasibility and Cost Analysis Tools
Systems Analysis and Design Fourth Edition
The Systems Analyst’s ToolkitPart 2 Feasibility and Cost Analysis
Tools
Systems Analysis and Design Fourth Edition
Objectives
Define economic feasibilityIdentify the cost considerations that
analysts consider throughout the SDLCUnderstand chargeback methods and
how they are usedUse cost-benefit analysis, payback
analysis, return on investment analysis, and present value analysis
Systems Analysis and Design Fourth Edition
Introduction
A project is economically feasible if the future benefits outweigh the costs
The Systems Analyst’s Toolkit explains how to calculate a project’s costs and benefits
Cost-benefit analysis is performed whenConducting a preliminary investigationEvaluating a projectMaking recommendations to
management
Systems Analysis and Design Fourth Edition
Describing Costs and Benefits
Cost classificationsCosts can be classified in several ways
Tangible and intangible costsDirect and indirect costsFixed and variable costsDevelopmental and operational costs
Systems Analysis and Design Fourth Edition
Describing Costs and Benefits
Direct and indirect costsDirect costs are those that can be
associated with the development of a specific systemExamples: project team salaries, new
hardware or software needed for the system
Indirect costs, or overhead expenses, cannot be attributed to a particular systemExamples: network administrator’s salary,
copy machine rental costs
Systems Analysis and Design Fourth Edition
Describing Costs and Benefits
Fixed and variable costsFixed costs are relatively constant and do
not depend on a level of activity or effortExamples: salaries, rental charges
Variable costs depend on the level of activityExamples: printer paper, supplies, telephone
line charges
Systems Analysis and Design Fourth Edition
Describing Costs and Benefits
Developmental and operational costsDevelopment costs are incurred only
once, at the time the system is developedExamples: system development team
salaries, user training, hardware purchase
Operational costs are incurred after the system is implemented and continue while the system is in useExamples: system maintenance, ongoing
training, annual license fees
Systems Analysis and Design Fourth Edition
Describing Costs and Benefits
Managing information systems costs and chargesManagement requires cost informationDirect costs can be associated with a specific
system, while indirect costs must be allocatedA chargeback method uses accounting entries to
allocate the indirect IS costsNo charge methodFixed charge methodVariable charge method based on resource useVariable charge method based on volumes
Systems Analysis and Design Fourth Edition
Describing Costs and Benefits
Managing information systems costs and charges Chargeback methods
No charge methodTreats 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
Systems Analysis and Design Fourth Edition
Describing Costs and Benefits
Managing information systems costs and charges Chargeback methods
Fixed charge methodIndirect IS costs are divided among all other
departments in the form of a fixed monthly charge, using various formulas
In this method, the IS group is called a profit center because it is expected to break even or show a profit on the sale of services
User departments are charged with a fixed share of indirect IS expenses
Systems Analysis and Design Fourth Edition
Describing Costs and Benefits
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 monthIn this method, the IS group is called a profit centerUser departments are charged with indirect IS
expenses on the basis of resources used
Systems Analysis and Design Fourth Edition
Describing Costs and Benefits
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 monthIn this method, the IS group is called a profit centerUser departments are charged with indirect IS
expenses on the basis of resources used
Systems Analysis and Design Fourth Edition
Describing Costs and Benefits
Benefit classificationsBenefits can be classified into the same
categories as costsTangible and intangible benefitsDirect and indirect benefitsFixed and variable benefitsDevelopmental and operational benefits
Benefits also can be classified as positive benefits and cost-avoidance benefits
Systems Analysis and Design Fourth Edition
Describing Costs and Benefits
Positive and cost-avoidance benefitsPositive benefits are a direct result of the
new information systemExamples: increased revenues, improved
services, higher morale, better management
Cost-avoidance benefits refer to expenses that would be necessary if the new system is not installedExamples: handling work with current staff
instead of hiring, not having to replace hardware or software
Systems Analysis and Design Fourth Edition
Cost-Benefit Analysis
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 techniquesPayback analysisReturn on investment (ROI) analysisPresent value analysis
Systems Analysis and Design Fourth Edition
Cost-Benefit Analysis
Payback analysisPayback analysis is the process of
determining how long it takes for an information system, to pay for itself
Four step process1. Determine the system’s initial development
cost 2. Estimate annual benefits3. Determine annual operating costs4. Find the payback period by comparing total
costs to accumulated benefits
Click to see Figure 2-1 Click to see Figure 2-1 Package
Systems Analysis and Design Fourth Edition
Cost-Benefit Analysis
Payback analysisWhen 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
Systems Analysis and Design Fourth Edition
Cost-Benefit Analysis
Payback analysisWhen costs are plotted, the economically
useful life of the system is shownSystems development costs are high at
first, then dropOperational costs remain low at first, then
increase as more maintenance is required
Click to see Figure 2-2 Click to see Figure 2-2 Package
Systems Analysis and Design Fourth Edition
Cost-Benefit Analysis
Payback analysisWhen costs are plotted, the economically
useful life of the system is shownSystems development costs are high at
first, then dropOperational costs remain low at first, then
increase as more maintenance is requiredBenefits usually increase rapidly when the
system becomes operational, then level off
Click to see Figure 2-3 Click to see Figure 2-3 Package
Systems Analysis and Design Fourth Edition
Cost-Benefit Analysis
Payback analysisWhen 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
Click to see Figure 2-4 Click to see Figure 2-4 Package
Systems Analysis and Design Fourth Edition
Cost-Benefit Analysis
Payback analysisPros 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
Systems Analysis and Design Fourth Edition
Cost-Benefit Analysis
Using a spreadsheet to compute payback analysisDesign the spreadsheet and label the
rows and columnsEnter the cost and benefit data for each
yearEnter the formulas to calculate
cumulative costs and benefits
Click to see Figure 2-6 Click to see Figure 2-6 Package
Click to see Figure 2-5 Click to see Figure 2-5 Package
Systems Analysis and Design Fourth Edition
Cost-Benefit Analysis
Return on investment analysisROI 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
Click to see Figure 2-7 Click to see Figure 2-7 Package
Systems Analysis and Design Fourth Edition
Cost-Benefit Analysis
Return on investment analysisPros 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
Systems Analysis and Design Fourth Edition
Cost-Benefit Analysis
Using a spreadsheet to compute ROISet up the worksheet and enter cost and
benefit dataOverall cost and benefit totals are
requiredAdd a formula to calculate ROI, which is
total benefits minus total costs, divided by total costs
Click to see Figure 2-8 Click to see Figure 2-8 Package
Systems Analysis and Design Fourth Edition
Cost-Benefit Analysis
Present value analysisThe time value of money is a concept that
adjusts future costs and benefits and expresses them in terms of current dollars
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
Systems Analysis and Design Fourth Edition
Cost-Benefit Analysis
Present value analysisPresent 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
Click to see Figure 2-9 Click to see Figure 2-9 Package
Systems Analysis and Design Fourth Edition
Cost-Benefit Analysis
Present value analysis1. Use present value tables to time-adjust
valuesLocate 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
Click to see Figure 2-10 Click to see Figure 2-10 Package
Systems Analysis and Design Fourth Edition
Cost-Benefit Analysis
Present value analysis1. Use present value tables to time-adjust
valuesLocate 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 benefits3. The net present value (NPV) is total
benefits minus total costs
Click to see Figure 2-11 Click to see Figure 2-11 Package
Systems Analysis and Design Fourth Edition
Cost-Benefit Analysis
Present value analysisPros 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
Systems Analysis and Design Fourth Edition
Cost-Benefit Analysis
Using a spreadsheet to calculate present valueSet up the worksheet and enter costs,
benefits, and present value adjustment factors
Provide cost and benefit totalsAdd 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
Click to see Figure 2-12 Click to see Figure 2-12 Package
EndToolkit Part 2