1. PRJ566: Project Planning and Management
Payback

2. Agenda
What is cost benefit analysis?
Payback
Examples

3. Costs--one time Development costs – wages, contract fees
Initial Training costs
Initial equipment costs – hardware, software, network

4. Costs--ongoing Overhead - facilities, office space, etc.
Web site costs--domain name renewal, Web hosting
Communication costs--phone, Internet, and so on
Maintenance of software and hardware
“Maintenance” of staff (ongoing training, and so on)

5. Benefits-can come from
Cost savings
People (use less), time (get work done faster), equipment (eliminate), mistakes (make less)
New services to clients - revenue
Mandatory changes
Strategic advantage
Make more money!
Technical reasons

6. Cost Benefit Analysis Project timeframe: months or years, etc
Cumulative means add in total from previous column
Include previous column total into next column
Note: be sure all costs are consistent to fit your timeframe. i.e. if your timeframe is months, each cost amount must be a monthly cost
Note: Timeframe 0 is for project development

7. Example 1 Purchase & Install Remote Control Software Currently:
20% calls (=200/mo) involve visit to client’s office
Visit averages 15 min, with average 2 hour client wait time

8. Example 1 Purchase & Install Remote Control Software Currently:
Use $60/hr client time
Wait time costs 200 x 2hrs x $60/hr
Wait time costs $24,000 per month

9. Example 1 Purchase & Install Remote Control Software
Proposed Solution:
$90,000 remote control software
To install--$10,000 labour and training
Maintenance of $8,400 per year ($700/mo)

10. Cost Benefit Analysis

11. Agenda
What is cost benefit analysis?
Payback
Examples

12. Payback
Represents the point in time when the benefits are greater than the costs
Cumulative Benefits – Cumulative Costs

13. Example 1

14. Payback Analysis
Payback period = time required to recoup costs of project
Payback occurs when accumulated benefits > accumulated costs (the sooner the better!)
Typically - there is a ceiling

15. Return on Investment Analysis
You invested a certain amount of $ (costs)
What did you earn on this money?(Benefits)
What was your return in a certain amount of time?

16. Return On Investment Analysis
Accum. Benefits - Accum. Costs
ROI =
X 100
Accum. Costs

17. Example 1

18. ROI Example 1
$16,500
ROI =
X 100
= 16%
Over 5 months
$103,500

19. ROI Example 1
$39,800
ROI =
X 100
= 38%
Over 6 months
$104,200

20. When Comparisons are Difficult
What do you do when the best option does not come out on top in terms of $?
Look at risks
Look at intangible costs and benefits

21. Example 2
GMS--Great Marketing Services asks the IT Project Manager to research improvements to its outdated flyer development system
GMS develops marketing fliers for various organizations

22. Example 2 GMS collects photos, diskettes from client
GMS scans photos, lays out flyer using old flyer software
GMS prints flyer, courier to client
Client reviews, corrects, courier back
GMS prints final copy, sends to printer
GMS arranges for flyer distribution

23. Example 2
Situation:
Flyer development takes too long and is too manual. Automation of the process is necessary
Manual systems are causing lengthy delays, high errors
Competitors are going to automation, to the Internet

24. Example 2 One time Costs: Software $90k, Installation $120k
Internet infrastructure (labour, hardware, software) $190K
PM Salary $100K
Upgrade PCs/monitors $120k
Train layout staff $20k
Marketing to clients $80k

25. Example 2 Ongoing Costs:
Maintenance of internet infrastructure $15k/yr then $17k/yr after 1 year
New Software maintenance $10k/yr
Hardware upgrade costs $15k/yr then $20k/yr after 2 years

26. Example 2

27. Example 2 Benefits: Save $70k/yr wages in review/correct process
Save $40k/yr (1 employee) in layout process (cut from 2 to 1 weeks)
Estimate $50k/yr increase in business for 4 years, then stay level

28. Example 2

29. Example 2
Analysis
Payback
ROI

31. Example 2 Analysis Payback in Year 4 ROI = $44k/$896k = 5% at 4 years

32. Example 2 Recommendation? Is this ROI acceptable to management?
Payback takes a LONG time!
What are other factors?
Competition--is there a choice?
Risks--can clients handle new system?
Risks--can employees handle new system?