SAAD Cost Benefit Analysis(Notes) (1)

7/29/2019 SAAD Cost Benefit Analysis(Notes) (1)

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Systems Analysis and Design

Strategies for cost-benefit analysis

(Additional notes)


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CT026-1 Systems Analysis and Design The traditional systems development lifecycle Slide 31 (of 43)

Strategies for cost-benefit

analysis

Payback Analysis

Accumulated Benefits equal Accumulated

Costs

Return on Investment Analysis

% of (total benefits total costs) / (total costs)

Net Present Value AnalysisValue of a dollar years from now based on a

discount rate


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Payback Analysis

Payback period

Four step process

[1] Determine the systems initial development cost

[2] Determine annual operating costs

[3] Estimate the annual benefits

[4] Find the payback period by comparing total costs to

accumulated benefits


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Year Costs Cumulative Cost

Year 0 60,000.00$ 60,000.00$

Year 1 17,000.00$ 77,000.00$

Year 2 18,500.00$ 95,500.00$

Year 3 19,200.00$ 114,700.00$

Year 4 21,000.00$ 135,700.00$Year 5 22,000.00$ 157,700.00$

Year 6 23,300.00$ 181,000.00$

Development

cost

Operating

Cost

Development Cost & Operating Cost

Payback Analysis


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Development Cost & Operating Cost

Payback Analysis


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Annual Benefits

Benefits Cumulative Benefits

3,000.00$ 3,000.00$28,000.00$ 31,000.00$

31,000.00$ 62,000.00$

34,000.00$ 96,000.00$

36,000.00$ 132,000.00$

39,000.00$ 171,000.00$

42,000.00$ 213,000.00$

Year

Year 0Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Payback Analysis


7/24CT026-1 Systems Analysis and Design The traditional systems development lifecycle Slide 9 (of 30)

Annual Benefits

Payback Analysis



What it is and what it is not:

not the point when the current benefits equal current costs

is the point where accumulated benefits equal accumulated

costs

How to compute

Use a spreadsheet

Design the spreadsheet and label the columns and rows

Enter the cost and benefit data for each year

Enter the formulas to calculate cumulative costs and benefits

Payback Analysis



Payback Analysis



Disadvantages:

places all the emphasis on early costs and benefits

ignores the benefits received after the payback period

Conclusion:

poor tool for comparing or ranking several projects

Payback Analysis



Payback Analysis



Quick Review Question

What is payback analysis and what does it measure?

What is payback period?

What is the formula to calculate the payback period?



Disadvantages:

ROI only measures the overall rate of return for the total

period

Annual rates can vary considerably

ROI ignores timing of costs and benefits

How to compute:

Set up the worksheet and enter cost and benefit data

Overall cost and benefit totals are required

Add a formula to calculate ROI, which is total benefits minus

total costs, divided by total costs





What is ROI analysis and what does it measure?

What is the formula to calculate ROI?



Present Value Analysis

Time Value of Money

A dollar today is worth more than a dollar one year from now.

Present value of a future dollar

the amount of money that when invested today at some

specified interest rate (discount rate / opportunity cost)

would grow exactly to one dollar at that point in the future



Formula:

Present value of a dollarnyears from now at a discount rate

ofiis calculated as follows :

n

PV = 1 / (1 + i)




Present Value Adjustment Factors:

are based on a specified interest rate called the discount

rate.

Each company determines its own acceptable rate of return

for an information systems project

are printed in tables called present value tables



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Present Value Table:

PERIODS 6% 8% 10% 12% 14%

1 0.943 0.926 0.909 0.893 0.877

2 0.890 0.857 0.826 0.797 0.769

3 0.840 0.794 0.751 0.712 0.675

4 0.792 0.735 0.683 0.636 0.592

5 0.747 0.681 0.621 0.567 0.519

6 0.705 0.630 0.564 0.507 0.456

7 0.665 0.583 0.513 0.452 0.400

8 0.627 0.540 0.467 0.404 0.351

9 0.592 0.500 1.424 0.361 0.308

10 0.558 0.463 0.386 0.322 0.270



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How to compute:

Enter the unadjusted cost and benefit values and the

discount factors for each year

Enter a formula to produce an adjusted value for each cost

and benefit entry to produce an adjusted value, theformula should multiply the cost or benefit value times the

discount factor

Copy your formula to the other cost and benefit cells to

adjust the other value

Calculate the net present value by subtracting the total

adjusted costs from the total adjusted benefits



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How to compute:

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Total

Benefits 3,000.00 28,000.00 31,000.00 34,000.00 36,000.00 39,000.00 42,000.00

PresentValue Factor

(12%) 1.000 0.893 0.797 0.712 0.636 0.567 0.507

Present

Value 3,000.00 25,004.00 24,707.00 24,208.00 22,896.00 22,113.00 21,294.00 143,222.00

Costs 60,000.00 17,000.00 18,500.00 19,200.00 21,000.00 22,000.00 23,300.00Present Value

Factor (12%) 1.000 0.893 0.797 0.712 0.636 0.567 0.507

Present

Value 60,000.00 15,181.00 14,744.50 13,670.40 13,356.00 12,474.00 11,813.10 141,239.00

Net Present

Value 1,983.00



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Advantages:

not only considers all costs and benefits, but adjusts the

values based on timing

Disadvantages:

depend on future estimates

are only as reliable as the forecasts themselves

Conclusion:

Many companies use all three methods to evaluate projects



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What is present value analysis and what does it

measure?

What is the meaning of the phrase, time value of

money?


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Summary

Payback Analysis

Accumulated Benefits equal Accumulated Costs


% of (total benefits total costs) / (total costs)

Net Present Value Analysis

Value of a dollar years from now based on a discount rate

SAAD Cost Benefit Analysis(Notes) (1)

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