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Published by Satinder Singh

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Published by: Satinder Singh on Mar 28, 2011
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Cost Benefit Analysis y How much will system cost ??? y What benefits will the system provides ??? y Is the proposed system is cost effective ??? .

y Training cost: May be on packaged training courses or hourly fee. consultants. y Computer usage: Computer will be used for one or more programming. processing and maintaining a project. programmers computer operators and other employees in an organization. testing. y Cost of any new software and equipment cost. data entry personnel. . y Supply and Duplication cost.Factors on which the system cost depends: y Personnel cost: Salary of system analyst.

2. Identify the Costs and benefits pertaining to a given project. 3. 4.(cost of s/w. h/w or on an opportunity).Steps to determine costs and benefits: 1. Take action . Categorize the various costs and benefits for analysis. 5. Select a method of evaluation. Interpret the results of the analysis.

2. Variable cost and benefits: Which occurs in proportion to some usage factor. Indirect cost and benefits: Results of operations that are not directly associated with the given system. Direct cost and benefits: Those with which a specific dollar figure can be directly associated in the project.Types of cost and benefits: 1. Fixed cost and benefits: Which occurs at regular interval of time but at relatively fixed rate. 4. . 3.

 Elimination of  Increased jobs steps. Tangible benefits: Quantified/Measurable  Few processing error and increased throughput. sales  Reduced credit loses  Reduced Expensive. Intangible benefits: Which can not be quantified.Cont 5.(client satisfaction) . 6.  Decreased respond time.

Selection of a method of evaluation Methods:  Net Present Value(NPV)  Return on investment(ROI)  Payback Analysis  Net benefit analysis  Present value analysis  Break-even analysis  Cash-flow analysis .

the discount rate (the rate of return that could be earned on an investment in the financial markets with similar risk. B= 47558 y t . inflow minus outflow) at time t.the time of the cash flow NPV=17558 %age=. . y Rt/(1+i)pow t where I=30000.58 y i . For educational purposes.Net present value(NPV) y NPV equals to discounted benefits minus discounted costs.) y Rt .the net cash flow (the amount of cash. R0 is commonly placed to the left of the sum to emphasize its role as (minus) the investment.

e. the project should be rejected.. strategic positioning or other factors not explicitly included in the calculation.. y If NPV < 0 the investment would subtract value from the firm . y If NPV = 0 the investment would neither gain nor lose value for the firm .Cont y If NPV > 0 It means. the investment would add value to the firm . This project adds no monetary value. We should be indifferent in the decision whether to accept or reject the project. Decision should be based on other criteria. the project may be accepted..g. .

y Shorter the payback period sooner the profit realized. y For example. . a $1000 investment which returned $500 per year would have a two year payback period.Payback analysis y It is the method to determine the period of time required for the return on an investment to "repay" the sum of the original investment.

we take the following formula PV=F/(1+i)pow n Where.53 means if we invest 1491.53 $ today at 15% interest than we can expect the profit of 3000$ after 5 yrs.15)5 = 1491. . i is the rate of interest & n is the time y Example: Present value of $3000 invested at 15% interest at the end of 5th year is calculates as P = 3000/(1 + .Present value analysis y It is used for long-term projects where it is difficult to compare present costs with future benefits. y To compute the present value. In this method cost and benefit are calculated in term of today's value of investment.

y NB=2000-650 = 1350 y Formula: F=p(1+i)pow n .Net benefit analysis y NB=total benefit-total cost.

This is return period. This is an investment period. initially the costs exceed those of the current system.Break-even analysis y Break -even is the point where the cost of the proposed system and that of the current one are equal. y Beyond that point. When both costs are equal. it is break-even. y Break-even method compares the costs of the current and candidate systems. y In developing any candidate system. the candidate system provides greater benefit than the old one. .

Cont .

y CF=Revenue-Expenses Return on investment: . y We evaluate the various Inflows and outflows for the project. produce revenues from an investment in computer systems.Cash-flow Analysis y Some projects. such as those carried out by computer and word processors services. y Cash-flow analysis keeps track of accumulated costs and revenues on a regular basis.

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