1. COST-BENEFIT ANALYSIS GUIDE FOR NIH IT PROJECTS
Prepared by: Office of The Deputy Chief Information Officer
October, 1998 Revised May, 1999
SHOBA KRISHNAN
Summer 2004

2. GENERAL CONCEPTS OF COST-BENEFIT ANALYSIS
Definition: An evaluation of the costs and benefits of alternative approaches to a proposed activity to determine the best alternative.
Purpose:
The current laws relating to managing Information Technology in the Federal government
support better decision-making; demonstrate that at least three alternatives were considered
Guidance:OMB Circular A-94, A-76
Time Period: system life cycle
Alternative:at least three alternative means of achieving program objectives:one to continue with no change.
Identifying and Measuring Costs and Benefits Analysis.
Benefit-Cost Analysis , Cost-Effectiveness Analysis .

3. OVERVIEW OF THE CBA PROCESS
HOW IS THE CBA PERFORMED?
Determine/Define Objectives
Document Current Process
Estimate Future Requirements
Collect Cost Data
Choose at Least Three Alternatives
Document CBA Assumptions
Estimate Costs
Discount Costs and Benefits
Evaluate Alternatives
Perform Sensitivity Analysis

4. HOW IS THE CBA PERFORMED?
Determine/Define Objectives
Document Current Process Customer Services
System Capabilities
System Architecture
System Costs
Estimate Future Requirements Determine Life Cycle Time
Estimate Life-Cycle Demands

5. Steps (Contd..) Collect Cost Data Historical Organization Data
Current System costs
Market Research
Publications
Analyst Judgment
Special Studies
Choose at Least Three Alternatives
Document CBA Assumptions

6. Steps(Contd..)
Estimate Costs Activities & Resources ,Cost categories,Personnel,Indirect costs,Depreciation and Annual costs
Example for Tangible Asset Depreciation

7. Example of Annual costs-Activity Cost Matrix

8. CBA Process (Contd..) ESTIMATE BENEFITS
Define, Identify,Establish a measurement Criteria ,Classify –Estimate Tangible Quantify Intangible Benefits
Example– Shows the scores for Benefits A-G from 4 reviewers using a scale of 1 to 5

9. Weighted Scoring

10. Discount Costs and Benefits
Common unit conversion
P=F(1/(1+I)^ n) where P- Present value,F – future value,n –no of years and I Interest rates.1/(1+I)^ n is the discount factor
Exhibit 9, Discounted Costs and Benefits

11. Evaluate Alternatives
Evaluate with Intangible Benefits
Direct compare
Convert into relative Values
Evaluate with Dollar value

12. Perform Sensitivity Analysis
tests the sensitivity of input parameters and the reliability of the results obtained from the benefit-cost analysis.
Input Parameters
System Requirement Definition Costs
System Development Costs
System Operation Costs
Transition Costs, Especially Software Conversion
System Life Cycle
Peak System Demands
Dollar Values and Relative Values for Benefits

13. Return On Investment RROI is a percentage (TDN-TDC)
ROI=Total Discounted Benefits – Total Discounted costs

14. A sales director is deciding whether to implement a new computer-based contact management and sales processing system. His department has only a few computers, and his salespeople are not computer literate. He is aware that computerized sales forces are able to contact more customers and give a higher quality of reliability and service to those customers. They are more able to meet commitments, and can work more efficiently with fulfillment and delivery staff.
His financial cost/benefit analysis is shown below: 
Costs: New computer equipment:
10 network-ready PCs with supporting $1,225 each
1 $1,750
3 $600 each
Cabling & $2300
Sales Support $7500
Training costs:
Computer introduction - 8 $ 200 each
Keyboard skills - 8 $ 200 each
Sales Support System - 12 $350 each
Other costs:
Lost time: 40 man $ 100 / day
Lost sales through disruption: estimate: $10,000
Lost sales through inefficiency during first months: estimate: $10,000

15. Tripling of mail shot capacity: estimate: $20,000 / year
Other costs:
Lost time: 40 man $ 100 / day
Lost sales through disruption: estimate: $10,000
Lost sales through inefficiency during first months: estimate: $10,000
Total cost: $55,800
Benefits:
Tripling of mail shot capacity: estimate: $20,000 / year
Ability to sustain telesales campaigns: estimate: $10,000 / year
Improved efficiency and reliability of follow-up: estimate: $25,000 / year
Improved customer service and retention: estimate: $15,000 / year
Improved accuracy of customer information: estimate: $5,000 / year
More ability to manage sales effort: $15,000 / year
Total Benefit: $90,000/year
Payback time: $55,800 / $90,000 = 0.62 of a year = approx. 8 months