Information Systems Analysis and Design CSC340 Information Systems Analysis and Design CSC340 The Feasibility Study VII The Feasibility Study The objective of a feasibility study is to find out if an information system project can be done and if so how A feasibility study should tell management Whether the project can be done What are alternative solutions What are the criteria for choosing among them Is there a preferred alternative After a feasibility study management makes a go no go decision Types of Feasibility Cost Benefit Analysis Risk Analysis Comparing Alternatives Information Acquisition Feasibility Study Contents Do it A feasibility study is a management oriented activity 2004 Jaelson Castro and John Mylopoulos The Feasibility Study 1 Information Systems Analysis and Design CSC340 2004 Jaelson Castro and John Mylopoulos Information Systems Analysis and Design CSC340 Economic Feasibility Dimensions of Feasibility Operational how will the solution work Technical is the technology needed available Economic return on investment Schedule can the system be delivered on time The bottom line for many projects Economic feasibility amounts to judging whether possible benefits of the project are worthwhile As soon as a specific solution has been identified the analyst can weigh the costs and benefits of each alternative This is called cost benefit analysis Constraints may be hard or soft 2004 Jaelson Castro and John Mylopoulos The Feasibility Study 2 The Feasibility Study 3 Information Systems Analysis and Design CSC340 2004 Jaelson Castro and John Mylopoulos Information Systems Analysis and Design The Feasibility Study 4 CSC340 Cost Benefit Analysis Types of Benefits The purpose of a cost benefit analysis is to answer questions such as Is the project justified benefits outweigh costs Can the project be done within cost constraints What is the minimal cost to attain a certain system Difficulties discovering and assessing benefits and costs they can both be intangible hidden and or hard to estimate it s also hard to rank multi criteria alternatives Benefits may be classified into one of the following categories Monetary when values can be calculated Tangible Quantified when benefits can be quantified but values can t be calculated Intangible when neither of the above applies How to identify benefits By organizational level operational lower middle higher management or by department production purchasing sales 2004 Jaelson Castro and John Mylopoulos The Feasibility Study 5 2004 Jaelson Castro and John Mylopoulos Page The Feasibility Study 6 Information Systems Analysis and Design CSC340 Information Systems Analysis and Design Types of Costs Project related costs Development and purchasing costs Installation training and conversion costs Operational costs on going Maintenance hardware software facilities Personnel operation maintenance For a small business that wants to introduce a PC based information system these cost categories amount to Project costs purchase hardware software furniture customize software train install file conversion On going costs operating the system data entry backups helping users vendors etc maintenance software and user support hardware and software maintenance supplies 2004 Jaelson Castro and John Mylopoulos 28 000 25 000 7 000 2 250 4 500 600 2 500 Expenses 4 Smalltalk training registration 3500 00 student 14 000 New Hardware Software 1 Development Server Pentium Pro class 1 Server Software operating system misc 1 DBMS server software 7 DBMS Client software 950 00 per client 18 700 1 500 7 500 6 650 Total Development Costs 118 200 PROJECTED ANNUAL OPERATING COSTS Personnel 2 Programmer Analysts 125 hours ea 25 00 hr 1 System Librarian 20 hours ea 10 00 hr 6 250 200 Expenses 1 Maintenance Agreement for Pentium Pro Server 1 Maintenance Agreement for Server DBMS software Preprinted forms 15 000 year 22 form 995 525 3 300 Total Projected Annual Costs The Feasibility Study 7 Information Systems Analysis and Design CSC340 Personnel 2 System Analysts 400 hours ea 35 00 hr 4 Programmer Analysts 250 hours ea 25 00 hr 1 GUI Designer 200 hours ea 35 00 hr 1 Telecommunications Specialist 50 hours ea 45 00 hr 1 System Architect 100 hours ea 45 00 hr 1 Database Specialist 15 hours ea 40 00 hr 1 System Librarian 250 hours ea 10 00 hr CSC340 Sample Costs for a ClientServer Devel nt Project 11 270 2004 Jaelson Castro and John Mylopoulos Information Systems Analysis and Design The Feasibility Study 8 CSC340 Accounting Methods Discount Rate Payback Analysis how long will it take usually in years to pay back the project and accrued costs Total costs initial incremental Yearly return or savings Return on Investment Analysis Analysis compares the lifetime profitability of alternative solutions Lifetime benefits Lifetime costs Lifetime costs Net Present Value Analysis determines the profitability of the new project in terms of today s dollar values Will tell you that if you invest in the proposed project after n years you will have XXX profit loss on your investment A dollar today is worth more than a dollar tomorrow The dollar values used in this type of analysis should be normalized to refer to current year dollar values For this we need a number the discount rate which measures the opportunity cost of investing money The number is company industry specific To calculate the present value i e the real dollar value given the discount rate i n years from now we use the formula Present 1 Value n 1 i n For example if the discount rate is 12 then Present Value 1 1 1 0 12 1 0 893 Present Value 2 1 1 0 12 2 0 797 2004 Jaelson Castro and John Mylopoulos The Feasibility Study 9 Information Systems Analysis and Design CSC340 2004 Jaelson Castro and John Mylopoulos Information Systems Analysis and Design The Feasibility Study 10 CSC340 Payback Analysis Basically we need to compute Total costs initial incr Yearly return or savings but it must be done with present dollar values Cash Flow Dev Costs Oper Costs Present Value Time adj Costs Cumulative Costs Year 0 100 000 Year 1 Year 2 Year 3 Year 4 4 000 4 500 5 000 5 500 1 0 893 0 797 0 712 0 636 100 000 3 572 3 587 3 560 3 816 100 000 103 572 107 159 110 719 114 135 Benefits 0 25 000 30 000 35 000 50 000 T adj Benefits 0 22 325 23 910 24 920 31 800 Cumulative Benefits 0 22 325 46 235 71 155 102 955 Net Costs Benefits 100 000 81 243 60 924 39 564 11 580 The net present value of the investment in the project after 5 years is 13 652 and
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