Cost benefit analysis. Documenting feasibility report.

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Cost benefit analysis. Documenting feasibility report.

COST-BENEFIT ANALYSIS

This is done to find economic feasibility of proposed solution and to find whether returns by implementing a system justify the cost. This is found by listing direct and indirect costs

Direct cost- Cost of computer, software, space, human resource, material, travel, training etc.

Indirect cost- Time spent by persons and data gathering

BENEFITS

Tangible benefits are measurable.

Direct benefits are savings due to reduced inventory, early collection of outstanding payments, reduced wastage, faster production, increased production.

Indirect benefit is increased work done with same human resource. Intangible benefits are like better service to customers, superior product quality, accurate, reliable, timely and up-to-date strategic, tactical and operational information to management

COST BENEFIT ANALYSIS

CASE STUDY OF HOSTEL INFORMATION SYSTEM

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Benefits : - Inventory reduction 5% of mess bill of 400 students Daily rate=Rs 45

Savings= 45*0.05*30*400=Rs 27,000

- Transport cost saving=Rs 800 per month

- Savings due to early payment

=material cost*1.2%=37.5*400*30*0.012=Rs 5400

- Savings due to early collection =40*1350*0.01=Rs 540

Direct saving=33740

Indirect benefit : student satisfaction due to itemized bill, predictable daily rate, better menu

Net Direct Saving per month= 33740-2000 = 31740

Total capital cost=l,30,000

PAY BACK PERIOD

SIMPLE: Cost 1,30,000

Saving 31,740 per month

Cost recovered in 130000/31740 = 4.1 months

Using interest on capital:

Monthly interest=0.015* 1,30,000 =Rs 1950 per month

Saving per month=31740-1950=29790

Cost recovered in 130000/29790 = 4.4 months

Present Value method

Accounts for the fact that a benefit accruing n months later will be lower today as the money if available today would have earned interest

If r = Interest rate in % per month.

n = number of months

x = benefit

Present value of benefit accruing n months later is: Present value = x/(1+r)n

COST-BENEFIT

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STRUCTURE OF EXCUTIVE SUMMARY

Feasibility report

•What the proposed system will achieve

•Who will be involved in operating the system

•Organizational changes to implement system

•List of benefits of the system

•Cost of system - Capital +Recurring

•Cost-benefit analysis

SYSTEM PROPOSAL STRUCTURE

•Introduction with outline of proposal

•Data flow diagram of existing system

•Modified DFD of proposed system

•Discuss alternative solutions

•List new equipment to be installed (if any)

•Technical,operational feasibility of analysis

•Cost- Benefit analysis

•New procedures, human resources and training needed

•Anticipated problems

•Implementation plan

REFERENCES

1. This module is based on Chapter 6, “Feasibility Analysis”, of the book Analysis and Design of Information Systems by V.Rajaraman, Prentice Hall of India. Parts of the the book have been used in case studies.

2. J.E.Kandall and J.E.Kandall, Systems Analysis and Design, 5th Edition, Pearson Education (Asia) 2003. Part of Chapter 3 pp.55-63 deal with feasibility analysis. It is reasonably well treated but does not have any quantitative examples.

3. R.Schultheis and Mary Summer, Management Information Systems, Tata McGraw Hill, 1999. Very short treatment of feasibility analysis as part of system Life Cycle (pp.544-545).

4. S.Alter, Information Systems, 4th Edition, Pearson Education Asia, New Delhi, 2002. A brief discussion of feasibility analysis presented on pp.481 as part of traditional life cycle method. In the same chapter there is a brief discussion of prototype method which is used when users are not able to state their requirements clearly.

5. K.C.Laudon and J.P.Laudon, Management Information Systems, Pearson Education Asia, New Delhi, 2004. Very brief discussion (one para only) on p.390)

6. J.A.Hoffer, J.F.George and J.S.Valacich, Modern Systems Analysis and Design, Pearson Education Asia, New Delhi 2002. Has a good discussion of feasibility. study on pp.168 to 181. Besides Technical, operational and Economic feasibility they also include other parameters which are schedule, legal/contractual and political feasibility which arise when one tries to develop a system.

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