Cost-Benefit and analysis -Tools and techniques


Costs fall into two categories. There are cost associated with developing the systems and there are costs associated with a operating a system. The former can be estimated from the outset of a project and should be refined at the end of each of each phase of the project. The latter can be estimated only after specific computer-based solution have been defined. Let’s take the closer look at the costs of information systems. The costs of developing an information system can be classified according to the phase in which they occur.
System development costs are usually one time costs that will not recur after the project has been completed. Many organizations have standard cost categories that must be evaluated. In the absence of such categories, the following list should be of help:

  • Personnel costs. The salaries of system analysts, programmers, consultants, data entry, Personnel, computers operators, secretaries, and the like who work on the project being estimated.
  • Computer usage. Computer time will be used for one or more of the following activities: programming, testing conversion, word processing. Maintaining a project dictionary, prototyping, loading a new data file, and the likes . If a computing center charges for usage of computer resources such as disk storage or report printing, the cost should be estimated.
  • Training. If the computer personnel or end-user have to be trained, the training courses may incur expenses. Packaged training courses may be charged out on a flat fee per site, a student fee or an hourly fee.
  • Supply duplications, and equipment costs.
  • Costs of any new computer equipment and software.

Almost nobody forgets system development budgets when itemizing costs. On the other hand, it is easy to forget that a system will incur costs after it is operating. The lifetime benefits must recover both the development and operating costs. unlike system development costs, operating costs tend to recur throughout the lifetime of the system. The costs of operating a system over its useful lifetime can be discussed below.

Present Value Analysis

Here the present value of the costs and benefits of the future periods is used to compare and so the analysis. For this “present value” computation discounting is done to compare the money with what would have been earned if the money was put in some other projects.

Suppose a benefit of Rs. 1000 is expected at the end of one year. The current annual interest rate is 10%.The future benefit of Rs. 1000 is therefore equivalent to the value of Rs. 1000 or an amount of Rs. 908 today is equivalent to Rs. 1000 a year later.

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A tabulation of present values is based on 12% interest. This analysis is used for such discounting for each future value to obtain the total present value of the benefits. It also shows that the present value of stream of future values of Rs. 1000 each for the next 6 year after discounting for 12% is Rs.4111.41.

Cost-Benefit and analysis -Tools and techniques

Net present value

The present value analysis when carried out for the net benefits is called the net present value or NPV. Time value of money is used for both costs and benefits. The analysis of the example in net benefits done using present value is shown in the table below.

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Cost-Benefit and analysis -Tools and techniques

Payback Analysis

When any project is started, many of the costs are incurred in the beginning while the benefits take time to start getting realized. Payback analysis is to determine when the accumulated benefits equal the initial investment. This period is called payback period. The shorter the period the faster the profits of the new system start to flow, and the more attractive the project seems.

This analysis may be done with or without taking into account the time value of money. Different payback periods may be obtained depending on whether or not the time value of money is taken into account. Table below shows an example of payback analysis.

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Cost-Benefit and analysis -Tools and techniques

Break-even Analysis

Break-even analysis compares the costs of the current system to the new system. A new system has a larger investment in the beginning- over time, benefits start coming in. on the other hand for the current existing system, the costs are mainly the operational costs. The cost per transaction will be lower than that the old system beyond some volume. This is called the beak-even point. Below this volume the old system is less costly while above this volume the new system is less costly.

A is an existing system with a steady costs of Rs. 4 per transaction while system B is a proposed a new system with a initial costs of Rs. 15000 and a transaction processing cost of Rs.1 per transaction after that. The break-point is reached at a transaction volume of 5000.

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Cost-Benefit and analysis -Tools and techniques

Cash Flow Analysis

Cash flows out when money is spent and is received with revenues and earnings. By tabulating both the out flow and the inflow of cash expected over a period of time a clear picture is obtained. The plot of the accumulated flow gives the payback period and a break point. It also gives an idea of how much cash will be needed to get the new system going. The point where the accumulated cash flow turns positive is the pay back period.

Frequently Asked Questions

Ans: System selection means selecting the various hardware, software, and services that are needed for implanting the system. Before the system selection can be done, it is necessary to know the capabilities of required proposed system view more..
Ans: It is a final report of the feasibility study about the findings and conclusion of the study. it should be possible to review report and take decision on the project based on it view more..
Ans: Feasibility studies are almost always conducted where large sums are at stake. Also called feasibility analysis. A feasibility study is conducted in order to determine the success and minimize the risks related to the project. When it becomes certain that the specific project could be carried out profitably view more..
Ans: Costs fall into two categories. There are cost associated with developing the systems and there are costs associated with a operating a system. view more..
Ans: Quantitative measure of degree to which a system, component or process possesses a given attribute For ex. No. of errors found per person hours expended Cost and Effort Estimation : Boehm’s COCOMO model, Putnam’s SLIM Model & Albrecht’s function model. view more..
Ans: There are three such classes: Process are collection of software related activities. Products are any artifacts, deliverables or documents that result from a process activity view more..
Ans: A direct measure is obtained by applying measurement rules directly to the phenomenon of interest.For example, by using the specified counting rules, a software program’s “Line of Code” can be measured directly. and sofware reliabity is .... view more..
Ans: What Is Information Systems Analysis and Design? Information systems analysis and design is a method used by companies ranging from IBM to PepsiCo to Sony to create and maintain information systems that perform basic business functions such as keeping track of customer names and addresses, processing orders, and paying employees. The main goal of systems analysis and design is to improve organizational systems, typically through applying software that can help employees accomplish key business tasks more easily and efficiently. As a systems analyst, you will be at the center of developing this software. view more..
Ans: concurrency of components, lack of a global clock and independent failures of components and the ability to work well when the load or the number of users increases – failure handling, concurrency of components, transparency and providing quality of service view more..
Ans: the wide range of applications in use today, from relatively localized systems (as found, for example, in a car or aircraft) to globalscale systems involving millions of nodes, from data-centric services to processorintensive tasks, from systems built from very small and relatively primitive sensors to those incorporating powerful computational elements, from embedded systems to ones that support a sophisticated interactive user experience, and so on. view more..
Ans: The task of a web search engine is to index the entire contents of the World Wide Web, encompassing a wide range of information styles including web pages, multimedia sources and (scanned) books view more..
Ans: The growth of the World Wide Web as a repository of information and knowledge; the development of web search engines such as Google and Yahoo to search this vast repository view more..
Ans: The engineering of MMOGs represents a major challenge for distributed systems technologies, particularly because of the need for fast response times to preserve the user experience of the game. view more..
Ans: a very different style of underlying architecture from the styles mentioned above (for example client-server), and such systems typically employ what is known as distributed event-based systems. view more..
Ans: the emergence of ubiquitous computing coupled with the desire to support user mobility in distributed systems view more..
Ans: The Internet is also a very large distributed system. It enables users, wherever they are, to make use of services such as the World Wide Web, email and file transfer. (Indeed, the Web is sometimes incorrectly equated with the Internet.) view more..
Ans: Technological advances in device miniaturization and wireless networking have led increasingly to the integration of small and portable computing devices into distributed systems. view more..
Ans: The crucial characteristic of continuous media types is that they include a temporal dimension, and indeed, the integrity of the media type is fundamentally dependent on preserving real-time relationships between elements of a media type. view more..

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