Systems Analysis & Design Sixth Edition Toolkit Part 3

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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
2
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
3
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
4
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)
5
Describing Costs and Benefits
● Cost Classifications
–
–
–
–
–
–
–
–
Tangible costs
Intangible costs
Direct costs
Indirect costs or overhead expenses
Fixed costs
Variable costs
Developmental costs
Operational costs
6
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
8
Describing Costs and Benefits
● Benefit Classifications
–
–
–
–
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
9
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
10
Cost-Benefit Analysis
● Payback Analysis
–
–
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
11
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
12
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
13
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
14
Cost-Benefit Analysis
● Return on Investment Analysis
15
Cost-Benefit Analysis
● Using a Spreadsheet to Compute ROI
16
Cost-Benefit Analysis
● Present Value Analysis
–
–
–
–
–
Time value of money
Present value analysis
Present value
Present value tables
Net present value (NPV)
17
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
18
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
21
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