Cost of data Mining

Existing processing cost incurred per month without Data Mining method

= No. of applicants per month *Processing cost

= 1,000 * 5,000
= INR 5,000,000

Given Confusion Matrix of test data:

Predicted
Class
Not
Loan Error
Actual Class Loan
Worthy rate
Worthy
Loan Worthy 800 200 0.2
Not Loan Worthy 100 900 0.1

Confusion Matrix for 1000 monthly applications:

Predicted Class
Not
Loan Error Loss
Actual Class Loan
Worthy rate incurred
Worthy
Loan Worthy 400 100 0.2 10000
Not Loan Worthy 50 450 0.1 25000

Calculation of Monthly Gain using Data Mining Approach:

Net Gain (Savings) = Cost incurred for manual processing – Loss incurred due to error in
prediction using data mining -monthly variable cost incurred for running data model

Loss incurred due to error in prediction (from table above) = 10000*100+25000*50

= INR 2,250,000
Recurring monthly variable cost of running data mining model: Hardware, Tools, etc.
= INR 1,000,000

Monthly savings = 5000000 – 2250000-1000000

= INR 1,750,000

Payback period:

Payback period is when cost of investment matches returns earned till that period.

1
 Using goal seek, for investment of INR 5,000,000, it takes 2.857 months with monthly
returns of INR 1,750,000 to achieve payback for the investment.
Hence, payback period = 2.857 months

Return of Investment:
Return for the year = 1750000*12 = INR 21,000,000
Investment = INR 5,000,000

ROI = (Return for the period / Investment made) *100%

= (21000000/5000000) * 100%

ROI = 420 %