Systems Analysis & Design
Sixth Edition
Toolkit Part 3
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)
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Describing Costs and Benefits
● Cost Classifications
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Tangible costs
Intangible costs
Direct costs
Indirect costs or overhead expenses
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
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Resource allocation
Connect time
Server processing time
4. Variable charge method based on volume
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Describing Costs and Benefits
● Benefit Classifications
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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
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Payback period
Carry out the following steps
1.
2.
3.
4.
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
– Economically useful life
– Calculate the time it takes for the accumulated
benefits of an information system to equal
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
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Cost-Benefit Analysis
● Return on Investment Analysis
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Cost-Benefit Analysis
● Using a Spreadsheet to Compute ROI
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Cost-Benefit Analysis
● Present Value Analysis
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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
– 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
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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 also must 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 Part 3 complete
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