Systems Analysis & Design 7 th Edition Systems Analysis & Design 7 th Edition Toolkit 3

22 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

33 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

44 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

55 Describing Costs and Benefits  Economic feasibility  Total cost of ownership (TCO)

66 Describing Costs and Benefits  Cost Classifications – Tangible costs – Intangible costs – Direct costs – Indirect costs or overhead expenses

77 Describing Costs and Benefits  Cost Classifications – Fixed costs – Variable costs – Developmental costs – Operational costs

88 Describing Costs and Benefits  Managing Information Systems Costs and Changes – Chargeback method 1.No charge method Cost center 2.Fixed charge method Profit center

99 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

10 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

11 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

12 Cost-Benefit Analysis  Payback Analysis – Payback period – Carry out the following steps 1.Determine the initial development cost of the system 2.Estimate annual benefits 3.Determine annual operating costs 4.Find the payback period

13 Cost-Benefit Analysis  Payback Analysis – Economically useful life

14 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

15 Cost-Benefit Analysis  Payback Analysis

16 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

17 Cost-Benefit Analysis  Return on Investment Analysis

18 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

19 Cost-Benefit Analysis  Present Value Analysis – Time value of money – Present value analysis – Present value – Present value tables – Net present value (NPV)

20 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

21 Cost-Benefit Analysis  Using a Spreadsheet to Calculate Present Value

22 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

23 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  Toolkit 3 complete