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Toolkit 3 Home Page – Welcome!
2
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
You must review a project’s costs and benefits at the end of each SDLC phase so management can decide whether or not to continue the project
Economic feasibility Total cost of ownership (TCO)
Figure TK 3-2
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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
For more information aboutPayback Analysis, visit scsite.com/sad7e/more, locate Toolkit Part 3 and then the Payback Analysis link.
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Cost-Benefit Analysis
Payback Analysis
– Economically useful life
– You calculate the time it takes for the accumulated benefits of an information system to equal the accumulated costs of developing and operating the system
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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
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
Figure TK 3-8 Figure TK 3-9
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Cost-Benefit Analysis
Return on Investment Analysis
ROI = (total benefits – total costs)/ total costs
– Projects must meet or exceed a minimum ROI
– You can also use ROI for ranking projects
– Measures the overall rate of return for the total period, and annual return rates can vary considerably
– Ignores the timing of costs and benefits
Figure TK 3-10
For more information aboutReturn on Investment Analysis, visit scsite.com/sad7e/more, locate Toolkit Part 3 and then the Return on Investment Analysis link.
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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
Figure TK 3-11
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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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For more information aboutPresent Value Analysis, visit scsite.com/sad7e/more, locate Toolkit Part 3 and then the Present Value Analysis link.
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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
Figure TK 3-14
For more information aboutTime Value, visit scsite.com/sad7e/more, locate Toolkit Part 3 and then the Time Value link.
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Cost-Benefit Analysis
Using a Spreadsheet to Calculate Present Value
– There is one more way to use a worksheet in present value analysis
– Most spreadsheet programs include a built-in present value function that calculates present value and other time-adjusted variable factors
Figure TK 3-15
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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
Systems Analysis & Design
7th Edition
End Toolkit 3