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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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CT026-1 Systems Analysis and Design The traditional systems development lifecycle Slide 5 (of 30)
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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CT026-1 Systems Analysis and Design The traditional systems development lifecycle Slide 6 (of 30)
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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CT026-1 Systems Analysis and Design The traditional systems development lifecycle Slide 7 (of 30)
Development Cost & Operating Cost
Payback Analysis
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CT026-1 Systems Analysis and Design The traditional systems development lifecycle Slide 8 (of 30)
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
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7/24CT026-1 Systems Analysis and Design The traditional systems development lifecycle Slide 9 (of 30)
Annual Benefits
Payback Analysis
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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
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Payback Analysis
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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
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Payback Analysis
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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?
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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
Return on Investment Analysis
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Return on Investment Analysis
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Quick Review Question
What is ROI analysis and what does it measure?
What is the formula to calculate ROI?
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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
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Formula:
Present value of a dollarnyears from now at a discount rate
ofiis calculated as follows :
n
PV = 1 / (1 + i)
Present Value Analysis
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18/24CT026-1 Systems Analysis and Design The traditional systems development lifecycle Slide 21 (of 30)
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
Present Value Analysis
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CT026-1 Systems Analysis and Design The traditional systems development lifecycle Slide 22 (of 30)
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
Present Value Analysis
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CT026-1 Systems Analysis and Design The traditional systems development lifecycle Slide 23 (of 30)
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
Present Value Analysis
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CT026-1 Systems Analysis and Design The traditional systems development lifecycle Slide 24 (of 30)
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
Present Value Analysis
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CT026-1 Systems Analysis and Design The traditional systems development lifecycle Slide 25 (of 30)
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
Present Value Analysis
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CT026-1 Systems Analysis and Design The traditional systems development lifecycle Slide 26 (of 30)
Quick Review Question
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
Return on Investment Analysis
% of (total benefits total costs) / (total costs)
Net Present Value Analysis
Value of a dollar years from now based on a discount rate
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