Costs and Benefits

Benefits Direct Cost Reduction. Cost displacement. Revenue Enhancement. Indirect Cost Avoidance. Performance Enhancement. Risk Reduction.

Sources of Costs: Ongoing Software upgrades and maintenance over time Communications Requirements Personnel i. Technical and support ii. Business and user Other i. Building space, air conditioning and utilities ii. Training and ongoing help

Sources of Cost: One-Time Software i. Product software direct costs ii. Infrastructure systems required to support the system Furniture and supplies Site Preparation Hardware Conversion, installation and testing Training and business adjustment

ROI Methods Implied Benefits Payback Period Net Present Value (NPV) Present value of future net benefits V = NB/(1 + r) n Internal Rate of Return (IRR) Interest (r) that makes NPV= 0

Benefit Assumptions PeriodInitial1234 Cost$10,000$ 3,000$ 2,000 $ 3,000 Benefit$ 0$12,000$15,000$18,000$ 9,000 Net Benefit -$10,000$ 9,000$13,000$16,000$ 6,000

Calculations for Payback Period PeriodInitial1234 Cost$10,000$ 3,000$ 2,000 $ 3,000 Benefit$ 0$12,000$15,000$18,000$ 9,000 Net Benefit -$10,000$ 9,000$13,000$16,000$ 6,000 Cum. Net Benefit -$10,000-$ 1,000$12,000$28,000$34,000

Calculations for Net Present Value (r= 11%): $24,311 PeriodInitial1234 Cost$10,000$ 3,000$ 2,000 $ 3,000 Benefit$ 0$12,000$15,000$18,000$ 9,000 Net Benefit -$10,000$ 9,000$13,000$16,000$ 6,000 PV Net Benefit -$10,000$ 8,108$10,551$11,699$ 3,952

Calculations for IRR (r= 101.4%): -$ 3 PeriodInitial1234 Cost$10,000$ 3,000$ 2,000 $ 3,000 Benefit$ 0$12,000$15,000$18,000$ 9,000 Net Benefit -$10,000$ 9,000$13,000$16,000$ 6,000 PV Net Benefit -$10,000$ 4,469$ 3,205$ 1,959$ 365