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NO: 20061519187 COURSE TITLE: TECHNOLOGY EVALUTION COURSE CODE: PBT 506 DATE: 30/09/2011 ASSIGNMENT 1 QUESTION: Write on any one method of Technology Evaluation. ANSWER:

Cost Benefit Analysis Methodology
Introduction: Cost benefit analysis is a method that facilitates decision makers of companies or institutions to evaluate potential outcomes and choose technologies to achieve these outcomes. Decisions that are well intended can lead to losses in results as unexpected outcomes develop, or as outcomes have unexpected consequences. Decision makers therefore have a great need for a framework which structures information in a way, which makes the complexity more tractable, but still takes into account the implications of the complexity. Cost-benefit analysis is an analytical tool, which has the potential to significantly advance this process. Cost-benefit analysis (CBA) provides a means for systematically comparing the value of outcomes with the value of resources achieving the outcomes required. It measures the economic efficiency of the proposed technology or project. When all else is equal more efficient projects should be chosen over less efficient ones. When there are many options to consider during a decision-making task, it is useful to evaluate the options with a common metric. Cost-benefit analysis refers to any type of structured method for evaluating decision options. CBA has become widely accepted among business and governmental organizations. Although CBA has definite limitations, especially in the non-standard way that the payoff function is derived and

its potential for making decisions more rational is comforting to those who must make the decisions. General description of the project 2. then the analysis is considered to be sensitive to that parameter. input parameters are sensitive. The system life cycle includes the following stages/phases: (1) feasibility study (2) design (3) development (4) implementation (5) operation and (6) maintenance. inputs may be divided into parameter values and benefit and cost values. Benefit and costs include monetary values for marketed goods. These factors are the following: 1. goods for which monetary values Factors for a reliable Cost Benefit Analysis There are some specific necessary factors for a reliable CBA. Parameters include the discount rate. List of alternative scenarios . In situations in which large amounts of money are at stake. monetary values for non-marketed directly used goods. the future rates of economic growth. In the end of the analysis the decision maker should do a sensitivity analysis for the costs and the benefits considered during the previous steps. For the application of CBA. if any. The analysis has to include at least three alternative solutions that consider alternative ways of fulfilling the demanded project. repeats the analysis with different input parameter values. Cost Benefit Analysis Components 1. operational capabilities. the presentation of a costbenefit analysis is the preferred way to demonstrate the reasoning behind investments. the future rates of inflation and the estimations about the future rates of technological change. or system outputs. If a relatively small change in the value of an input parameter changes the alternative selected.calculated. resource requirements. The CBA time period should match the system life cycle. 2. 3. Sensitivity analysis identifies those input parameters that have the greatest influence on the outcome. and evaluates the results to determine which. A system life cycle ends when the system is terminated or is replaced by a system that has significant differences in processing. monetary values for non-marketed passively used goods.

Some possible benefits for the servicing organization are productivity gains. Direct and Indirect Costs (Overhead). staffing reductions. and Annual Costs. After the benefits are identified. The application divides these into two kinds: The ones that are relatively straightforward to be measured and the ones that are not very easy to be measured. capabilities. first identify the benefits for both the customers and the organization that provides the service(s) to the customers. 3. the application lists the exact benefits and costs met in each of the alternative scenarios. To estimate benefits. the project/decision life etc. Identify Benefits and Costs: In this part. Sensitivity Analysis A CBA application includes the following stages: 1. Personnel Costs. Many factors must be considered during the process of estimating the costs associated with competing alternatives in a CBA. or improved organizational effectiveness. o Benefits are the services. the user has to establish performance measures for each . General description of the project: This part includes an explanation on the environment under which each analysis is done such as the objectives. Comparison of alternatives 6. Identify Benefits and Costs 4. The following factors must be addressed: Activities and Resources. Depreciation. This section lists the options considered during the analysis. Cost Categories. and qualities of each alternative system. Schedule Benefits and Costs 5. List of alternative scenarios: In order to decide which is the best option in the CBA we have to consider the costs and the benefits for each of these options. Benefits to customers are improvements to the current IT services and/or the addition of new services. the assumptions. 2. o All costs for the full system life cycle for each competing alternative must be included. and can be viewed as the return from an investment.3.

This sensitivity involves costs and benefits whose definition is not straightforward or is not easy to be exactly defined. Sensitivity analysis tests the sensitivity and reliability of the results obtained from the cost-benefit analysis.benefit. and n = number of years. it should be valued using a more subjective. compare and rank the discounted net value (discounted benefit minus discounted cost) of the competing alternatives. That is accomplished by discounting future Euro values. The comparison is illustrated with tables and graphs so as to facilitate decision making. convert them to a common unit of measurement to properly compare competing alternatives. Comparison of alternatives: In this part the application compares the alternative solutions. where P = Present Value. Schedule Benefits and Costs: For each of the alternatives defined in step 2. Sensitivity Analysis: In this part the application helps the user define how sensitive the results are to changes in the costs and benefits." The present value (also referred to as the discounted value) of a future amount is calculated with the following formula:P = F (1/(1+I)n). F = Future Value. the user now identifies the value of each benefit and cost for each year through the life cycle of the decision beginning from Year 0. I = Interest Rate. 5. if any. reviewers want assurance that the analysis is reliable. which is the start of the decision life. input parameters are sensitive. repeats the analysis with different input parameter values. All benefits for the full system life cycle for each competing alternative must be included. The final step is to estimate the value of the benefits. When the alternative with the lowest discounted cost provides the highest discounted benefits. When the costs and benefits for each competing alternative have been discounted. which transforms future benefits and costs to their "present value. qualitative rating system (which assigns relative numerical values for the competing alternatives). Since the CBA is normally the key document in the investment review process. Sensitivity analysis identifies those input parameters that have the greatest influence on the outcome. After the costs and benefits for each year of the system life cycle have been estimated. If a relatively small change in the value of an input parameter . 4. 6. and evaluates the results to determine which. If a benefit cannot reasonably be assigned a monetary value. it is clearly the best alternative.

changes the alternative selected. If the value of a parameter has to be doubled before there is a change in the selected alternative. the analysis is not considered to be sensitive to that parameter. then the analysis is considered to be sensitive to that parameter. . The estimates for sensitive input parameters should be re-examined to ensure that they are as accurate as possible.