1. Fundamentals of Software Engineering Economics (II) 1 LiGuo Huang Computer Science and Engineering Southern Methodist University Software Engineering Economics Multiple Goal Decision Analysis I (Chapters 13-15)

2. Multiple Goal Decision Analysis I Net value and marginal analysis –Decision rules –Example Present value analysis –Reconciling present and future cash flows –Discounting Figures of merit –Weighted sum –Delivered system capability 2

3. Marginal Analysis: Definitions X – Activity level of an alternative C(X) – Cost of alternative TV(X)– Total value of alternative (in same units as cost) NV(X)– Net value of alternative NV(X) = TV(X) – C(X) MNV(X) –Marginal net value MNV(X) = = - dx d(NV) dC dx d(TV) dx 3

4. C NV max X max X2X2 Activity level x (a) TV and C Cost and Total Value TV X1X1 4

5. X1X1 X max X2X2 Over- investment (b) NV = TV - C X NV max Net Value vs. Activity Level InvestmentProfitable 5

6. (b) MNV = d(TV)/dx – dC/dx Marginal Net Value X max X Activity level 6

7. Marginal Net Value Decision Rule In the “profitable” segment –If MNV > 0, Increase activity level –If MNV < 0, Decrease activity level –If MNV = 0, Activity level is optimal MNV = d(TV) / dx – dC/dx For Option B, with V T = value of each TR/sec, C(N) = 1007 + 20N; dC / dN = 20 TV(N) = V T (880N – 40N 2 ); d(TV) / dN = V T (880 –80N) 20 = V T (880 – 80N max ) N max = (880 V T – 20) / 80 V T = 11 – 1/(4V T ) 7

8. Optimal Number of Processors vs. Transaction Value 0.10.2 0.3 0.4 2 4 6 8 10 N max V T, $K N max = 11 – 1 /(4 V T ) 8

9. Value of Information Processing Products Time (e.g., Financial transactions) Cost of alternatives Opportunities presented by information Other factors –Reliability, accuracy… Value of an information processing products depends on two primary factors –The degree to which the resulting information helps us make critical decisions –The degree to which the information processing product satisfies basic human needs 9

10. TPS Decision Problem 3 Assuming use of composite option, we will acquire 5 processors/system and run option A for 2 years Which acquisition option should we choose: -A1: Rent processors for 2 years at $2400/Mo. -A2: Purchase processors for $100,000. Resell them for $50,000 after 2 years. 10

11. Interest Calculations Option A2 ties up $50K for 24 months How much would this be worth at an interest rate of.75%/month? V($50 K, 1) = $50 K (1.0075) V($50 K, 2) = $50 K (1.0075) (1.0075) … V($50 K, 24) = $50 K (1.0075) 24 = $59,820 For any sum X, V(X, 24) = X(1.0075) 24 11

12. Present Value Calculations What is the present value X of the $50K we will receive in 24 months? X = = $41,792 $50K PV (F, r, n) = (1.0075) 24 $50K V (X, 24) = X (1.0075) 24 = $50K PV ($50K,.0075, 24) = F (1 +r) n (1.0075) 24 12

13. -Of a future cash flow F -At an interest rate per time period r -Over a number of time periods n -Using the discount rate D = PV (F, D, n ) = FD n Present Value PV (F, r, n) = F (1 +r) n 1 1 + r 13

14. Present Value, Series of Cash Flows In option A1, we pay $2400 at the beginning of each month How much is this worth in present value? PV S ($2400, D, 1) = $2400 PV S ($2400, D, 2) = $2400 + $2400 D PV S ($2400, D, 3) = $2400 (1 + D + D 2 )... PV S ($2400, D, 24) = $2400 (1 + D + … + D 23 ) = $2400 (1 - D 24 ) / (1 – D ) For D = 1/1.0075 =.9925558, PV S ($2400, 1/1.0075, 24) = $52,928 14

15. Present Value of A Series of Cash Flows m equal cash flows or payments P –At the beginning of each time period Constant discount rate D PV S (P, D, m) = P [(1-D m )/(1-D)] 15

16. Present Value Analysis Results Simple Analysis Present Value Analysis Cost of A1$57,600$52,928 Cost of A2$50,000$58,208 16

17. 57600 55972 55640 58208 60622 50000 52908 54420 52928 51494 60 50 40 0 0.250.50.751.0% Interest rate per month Present value, $ Present Value Comparison vs. Interest Rate Option A2 Option A1 17

18. Applications to Software Engineering Making life-cycle cost comparisons between alternative systems during feasibility phase Timing of the purchase of the target machine for a new system Software life-cycle budget Some situations where present value analysis is not worth the effort –Comparative analysis of systems with similar distributions of cash flows over time 18

19. TPS Decision Problem 4 Choose best vendor operating system –System A – Standard OS –System A Plus Better diagnostics, maintenance features $40K added cost 19

20. Alternative TPS Operating System Characteristics Alternative CriterionSystem ASystem A Plus 1. Added Cost0$40K 2. Processor overhead200 3. Multiprocessor overhead80 4. Measurement capabilityPoorGood 5. Trace capabilityNoneAdequate 6. Diagnostics, error messagesAdequateGood 7. Maintenance supportMarginalGood 8. Accounting systemAdequateVery Good 9. Usage summariesNoneGood 10. DocumentationGoodAdequate 20

21. Meta-Decision Problems Lower CostMore Stability Lower cost More insight The system analysis decision problem The system decision problem 21

22. Weighted Sum Figure of Merit Assign weight W i to criterion i Σ i W i = 1 For each option j and criterion i, assign rating r iJ (0 < r ij < 10) Compute figure of merit for each option j F j = Σ W i r ij 22

23. TPS Operating System Figure of Merit Calculation System ASystem A Plus CriterionWeightCharacteristicRatingWeighted Rating CharacteristicRatingWeighted Rating 1. Added Cost30$010300$40K4120 2. Processor overhead10200330200330 3. Multiprocessor overhead158034580345 4. Measurement capability7Poor214Good856 5. Trace Capability8None00Adequate648 6. Diagnostics, error msgs10Adequate660Good880 7. Maintenance Support10Marginal440Good880 8. Accounting system2Adequate612Very good1020 9. Usage summaries3None00Good824 10. Documentation5Good840Adequate630 Total100541533 23

24. Diagnose Weighted Sum Wrong set of factors and weights are used An additive criterion function is used to evaluate a factor whose effect on system performance is multiplicative 24

25. Delivered System Capability (DSC) Figure of Merit DSC = (SC) (DC) (AV) SC: System Capability = Σ W i r ij DC: Delivered Capacity AV: Availability 25

26. The DSC Figure of Merit Dimensionless Covers effectiveness only SC component handles many criteria DC, AV components apply multiplicatively 26

27. Reduction of $150K maintenance cost – Maintenance Support: 20% ($30K) – Diagnostics, Error Msgs.: 10% (15K) – Documentation (worse): -10% (-15K) $30K – Net Cost = $650K + 40 – 30 = $660K Delivered capacity increase via measurement: 5% 2400 tr/sec (1.05) 2520 tr/sec Availability increase via diagnostics, error messages, trace capability: 50% less downtime 0.95 0.975 Gains from System A Plus - I 27

28. Gains from System A Plus - II System Capability Weight System A RatingScore System A Plus RatingScore Criteria Total Basic TPS Functions Accounting Systems Usage Summaries OS Documentation 0.95 0.01 0.03 1.0 0.6 0.0 0.8 0.950 0.006 0.000 0.024 1.0 0.8 0.4 0.950 0.010 0.008 0.012 0.980 28

29. TPS Comparison: Delivered System Capability CriterionSystem ASystem A Plus System capability (SC)0.980 Delivered capability (DC)24002520 Availability (AV)0.950.975 Delivered system capability (DSC)=(SC)(DC)(AV)22342408 Cost Capability/Cost ratio $650K 3.44 $660K 3.65 29

30. Revised TPS Weighted Sum Analysis System ASystem A Plus CriterionWeightCharacteristicRatingWeighted Rating CharacteristicRatingWeighted Rating 1. System capability (SC)400.98093600.9809360 2. Delivered capacity (DC)302400824025209270 3. Availability (AV)300.95072100.9759270 Total100810900 30

31. Comparison of Weighted Sum and DSC Figures of Merit Weighted sumDelivered system capability Relative advantages SimplerMore representative of many computer systems Better for assessing side effects of DC, AV factors Better for assessing wide variations in DC, AV factors RecommendationUse where DC, AV factors will not vary widely Use where DC, AV factors may vary widely 31