Cost Benefit Evaluation Techniques

Cost benefit analysis Steps Identifying all the costs and benefits of carrying out the project and operating the delivered application Expressing these costs and benefits in com on units

Categories of cost Development cost –includes development staff cost Setup cost-cost of putting the system in place Operational cost-operating the system after installation

Cash flow forecasting: Typical product life cycle cash flow

Netprofit

Payback period It is the time taken to break even or pay back the initial investment. Advantage: it is easy to calculate and is not sensitive to small forecasting errors. Disadvantage: it ignores the overall profitability of the project.

ROI-Return on Investment or ARR-Accounting rate of return ROI=average annual profit *100 total investment Eg: Netprofit:50000 and total investment 100000 ROI=50000/5 *100 100000 =10%

Net Present Value

Applying the discount factors to project 1

Internal rate of return It is calculated as the percentage discount rate that would produce NPV of zero. Calculated using the spreadsheet or other computer program that provides functions for calculating the IRR. Disadvantage: it does not indicate the absolute size of the return