1. The Systems Analysis Toolkit
Feasibility and Cost Analysis Tools

2. The Systems Analyst’s Toolkit
Part 2 Feasibility and Cost Analysis Tools
Systems Analysis and Design Fourth Edition

3. Objectives Define economic feasibility
Identify the cost considerations that analysts consider throughout the SDLC
Understand chargeback methods and how they are used
Use cost-benefit analysis, payback analysis, return on investment analysis, and present value analysis
Systems Analysis and Design Fourth Edition

4. 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 when
Conducting a preliminary investigation
Evaluating a project
Making recommendations to management
Systems Analysis and Design Fourth Edition

5. Describing Costs and Benefits
Cost classifications
Costs can be classified in several ways
Tangible and intangible costs
Direct and indirect costs
Fixed and variable costs
Developmental and operational costs
Systems Analysis and Design Fourth Edition

6. Describing Costs and Benefits
Direct and indirect costs
Direct costs are those that can be associated with the development of a specific system
Examples: project team salaries, new hardware or software needed for the system
Indirect costs, or overhead expenses, cannot be attributed to a particular system
Examples: network administrator’s salary, copy machine rental costs
Systems Analysis and Design Fourth Edition

7. Describing Costs and Benefits
Fixed and variable costs
Fixed costs are relatively constant and do not depend on a level of activity or effort
Examples: salaries, rental charges
Variable costs depend on the level of activity
Examples: printer paper, supplies, telephone line charges
Systems Analysis and Design Fourth Edition

8. Describing Costs and Benefits
Developmental and operational costs
Development costs are incurred only once, at the time the system is developed
Examples: system development team salaries, user training, hardware purchase
Operational costs are incurred after the system is implemented and continue while the system is in use
Examples: system maintenance, ongoing training, annual license fees
Systems Analysis and Design Fourth Edition

9. Describing Costs and Benefits
Managing information systems costs and charges
Management requires cost information
Direct costs can be associated with a specific system, while indirect costs must be allocated
A chargeback method uses accounting entries to allocate the indirect IS costs
No charge method
Fixed charge method
Variable charge method based on resource use
Variable charge method based on volumes
Systems Analysis and Design Fourth Edition

10. Describing Costs and Benefits
Managing information systems costs and charges
Chargeback methods
No charge method
Treats 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

11. Describing Costs and Benefits
Managing information systems costs and charges
Chargeback methods
Fixed charge method
Indirect 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

12. 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 month
In this method, the IS group is called a profit center
User departments are charged with indirect IS expenses on the basis of resources used
Systems Analysis and Design Fourth Edition

13. 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 month
In this method, the IS group is called a profit center
User departments are charged with indirect IS expenses on the basis of resources used
Systems Analysis and Design Fourth Edition

14. Describing Costs and Benefits
Benefit classifications
Benefits can be classified into the same categories as costs
Tangible and intangible benefits
Direct and indirect benefits
Fixed and variable benefits
Developmental and operational benefits
Benefits also can be classified as positive benefits and cost-avoidance benefits
Systems Analysis and Design Fourth Edition

15. Describing Costs and Benefits
Positive and cost-avoidance benefits
Positive benefits are a direct result of the new information system
Examples: increased revenues, improved services, higher morale, better management
Cost-avoidance benefits refer to expenses that would be necessary if the new system is not installed
Examples: handling work with current staff instead of hiring, not having to replace hardware or software
Systems Analysis and Design Fourth Edition

16. 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 techniques
Payback analysis
Return on investment (ROI) analysis
Present value analysis
Systems Analysis and Design Fourth Edition

17. Cost-Benefit Analysis
Payback analysis
Payback analysis is the process of determining how long it takes for an information system, to pay for itself
Four step process
1. Determine the system’s initial development cost
2. Estimate annual benefits
3. Determine annual operating costs
4. Find the payback period by comparing total costs to accumulated benefits
Systems Analysis and Design Fourth Edition
Click to see Figure 2-1

18. Cost-Benefit Analysis
Payback analysis
When 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

19. Cost-Benefit Analysis
Payback analysis
When costs are plotted, the economically useful life of the system is shown
Systems development costs are high at first, then drop
Operational costs remain low at first, then increase as more maintenance is required
Systems Analysis and Design Fourth Edition
Click to see Figure 2-2

20. Cost-Benefit Analysis
Payback analysis
When costs are plotted, the economically useful life of the system is shown
Systems development costs are high at first, then drop
Operational costs remain low at first, then increase as more maintenance is required
Benefits usually increase rapidly when the system becomes operational, then level off
Systems Analysis and Design Fourth Edition
Click to see Figure 2-3

21. Cost-Benefit Analysis
Payback analysis
When 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
Systems Analysis and Design Fourth Edition
Click to see Figure 2-4

22. Cost-Benefit Analysis
Payback analysis
Pros 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

23. Cost-Benefit Analysis
Using a spreadsheet to compute payback analysis
Design the spreadsheet and label the rows and columns
Enter the cost and benefit data for each year
Enter the formulas to calculate cumulative costs and benefits
Click to see Figure 2-5
Systems Analysis and Design Fourth Edition
Click to see Figure 2-6

24. Cost-Benefit Analysis
Return on investment analysis
ROI 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
Systems Analysis and Design Fourth Edition
Click to see Figure 2-7

25. Cost-Benefit Analysis
Return on investment analysis
Pros 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

26. Cost-Benefit Analysis
Using a spreadsheet to compute ROI
Set up the worksheet and enter cost and benefit data
Overall cost and benefit totals are required
Add a formula to calculate ROI, which is total benefits minus total costs, divided by total costs
Systems Analysis and Design Fourth Edition
Click to see Figure 2-8

27. Cost-Benefit Analysis
Present value analysis
The 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

28. Cost-Benefit Analysis
Present value analysis
Present 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
Systems Analysis and Design Fourth Edition
Click to see Figure 2-9

29. Cost-Benefit Analysis
Present value analysis
1. Use present value tables to time-adjust values
Locate 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
Systems Analysis and Design Fourth Edition
Click to see Figure 2-10

30. Cost-Benefit Analysis
Present value analysis
1. Use present value tables to time-adjust values
Locate 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 benefits
3. The net present value (NPV) is total benefits minus total costs
Systems Analysis and Design Fourth Edition
Click to see Figure 2-11

31. Cost-Benefit Analysis
Present value analysis
Pros 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

32. Cost-Benefit Analysis
Using a spreadsheet to calculate present value
Set up the worksheet and enter costs, benefits, and present value adjustment factors
Provide cost and benefit totals
Add 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
Systems Analysis and Design Fourth Edition
Click to see Figure 2-12

33. End Toolkit Part 2