Lecture 51 Project Costing

Lecture 52 Objectives Define economic feasibility Identify the cost considerations that analysts consider throughout the SDLC Describe cost-benefit analysis methods

Lecture 53 Introduction A project is economically feasible if the future benefits outweigh the costs Cost-benefit analysis is performed when –Conducting a preliminary investigation –Evaluating a project –Making recommendations to management

Lecture 54 Describing Costs and Benefits Cost classifications –Tangible and intangible costs –Direct and indirect costs –Fixed and variable costs –Developmental and operational costs

Lecture 55 Describing Costs and Benefits Tangible and intangible costs –Tangible costs have a specific dollar value e.g. salaries, purchase of hardware or software –Intangible costs are more difficult to measure e.g. reduced customer satisfaction, low morale in the organization –Although intangible costs are important, tangible cost figures should be used if available

Lecture 56 Describing Costs and Benefits Direct and indirect costs –Direct costs are those that can be associated with the development of a specific system e.g. project team salaries, new hardware or software needed for the system –Indirect costs, or overhead expenses, cannot be attributed to a particular system e.g. network administrator’s salary, copy machine rental costs

Lecture 57 Describing Costs and Benefits Fixed and variable costs –Fixed costs are relatively constant and do not depend on a level of activity or effort e.g. salaries, rental charges –Variable costs depend on the level of activity e.g. printer paper, supplies, telephone line charges

Lecture 58 Describing Costs and Benefits Developmental and operational costs –Development costs are incurred only once, at the time the system is developed e.g. system development team salaries, user training, hardware purchase –Operational costs are incurred after the system is implemented and while the system is in use e.g. system maintenance, ongoing training, annual license fees

Lecture 59 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

Lecture 510 Cost-Benefit Analysis It 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

Lecture 511 Cost-Benefit Analysis - Payback Analysis It 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

Lecture 512 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 Click to see Figure

Lecture 513 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 Click to see Figure

Lecture 514 Cost-Benefit Analysis - Present value analysis Time value of money : 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

Lecture 515 Cost-Benefit Analysis - Present value analysis –Benefits that you receive now are more valuable than those you receive in the future, because you gain the use of the money –Costs that you incur now are more expensive than those you incur in the future, because you lose the use of the money immediately

Lecture 516 Cost-Benefit Analysis - Present value analysis 1. Use present value tables to time-adjust values 2. Total the time-adjust costs and benefits 3. The net present value (NPV) is total benefits minus total costs Click to see Figure

Lecture 517 End of Lecture 5