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Session 5
Feasibility Study
Module Name: IT Project Management
Module Code: IT G09101

Dr. Bakari Mashaka, Bakiri Angalia & Dr. Lashayo

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Outline
• Feasibility Study
• Why doing Feasibility Analysis
• Types of feasibility
• Economic Feasibility
• Review Questions

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Software Process Planning

• The first stage in Software Project Planning

• Main tasks in planning

• System proposal/system request

• Conduct feasibility study

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Feasibility Study
What is it?

• A feasibility study is an attempt to

determine whether software system is
achievable given organizational resources
and constraints

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Feasibility Study
• Objectives of a feasibility study are
1. To find out if an information system
project can be done (...is it possible?...is
it justified?) and
2. To suggest possible alternative solutions

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Why doing Feasibility Analysis
1. To find out if an system development project can
be done:
– ...is it possible?
– ...is it justified?
2. To suggest possible alternative solutions.
3. To provide management with enough information
to know:
– Whether the project can be done
– Whether the final product will benefit its intended
users
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Types of feasibility

• Technical feasibility

• Organizational feasibility

• Economic feasibility
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Technical feasibility
• Is the project possible with current
technology?
• What technical risk is there?
• Availability of the technology:
– Is it available locally?
– Can it be obtained?
– Will it be compatible with other
systems?
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Organizational Feasibility

• If we build it, will they come?

– How well the system ultimately will be
accepted by its users and incorporated into
the ongoing operations of the organization
• Align with business objectives
• Stakeholder analysis considers
– Project champion(s)
– Organizational management
– System users
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Economic feasibility

• Is the project possible, given resource

constraints?
• What are the benefits?
– Both tangible and intangible
– Quantify them!
• What are the development and operational
costs?
• Are the benefits worth the costs?

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Economic feasibility

• Development costs

• Annual operational costs

• Annual benefits

• Intangible costs and benefit

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Economic feasibility

• We need to understand

– Break even analysis

– Payback period
– Net Present Value-NPV

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Expected Value

Costs Benefits

Tangible * *
* *
* *

Intangible * *
* *
* *

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Expected Value

Costs Benefits

Tangible * *
* *
* *
Intangible
* *
* *
* *

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Economic feasibility

• A process of identifying the financial benefits

and costs associated with a development
project
– Often referred to as cost-benefit analysis.
– Project is reviewed after each SDLC phase in
order to decide whether to continue, redirect,
or end a project.

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Costs
• An information system can have tangible costs
and intangible costs
• Tangible costs refer to items that you can easily
measure in terms of money and with certainty
• Examples:
– Hardware costs,
– Labor costs, or
– Supplies and other expenses
– Data or system conversion
– Operational costs including employee training
and building renovations
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Intangible costs

• Costs associated with an information system

that cannot be easily measured in terms of
money or with certainty.

• Intangible costs can include:

– Loss of customer goodwill,
– Employee morale, or
– Operational inefficiency

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Benefits

• Tangible benefits refer to items that can be

measured in money and with certainty.
• Examples include:
– reduced personnel expenses,
– lower transaction costs, or
– higher profit margins.

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Benefits
• Most tangible benefits will fit within the
following categories:
– Cost reduction and avoidance
– Error reduction
– Increased flexibility
– Increased speed of activity
– Improvement of management planning and
control
– Opening new markets and increasing sales
opportunities

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Intangible Benefits

• These are benefits derived from the system,

but cannot be measured in terms of money
and with certainty
• Examples of intangible benefits are
1. competitive necessity
2. Improved the organizational reputation,
3. Customer access to account details using
mobile phones
4. Faster decision making.
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Return on Investment

• The return on investment (ROI) measures the

amount of money an organization receives in
return for the money it spends

• A high ROI results when benefits far outweigh

costs

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Return on Investment

• ROI is determined by finding the total benefits

less the costs of the system and dividing that
number by the total costs of the system

• ROI can be determined per year or for the

entire project over a period of time

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Return on Investment Calculation

RETURN ON INVESTMENT EQUALS

Total (benefits - costs)

Divided by

Total costs

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Example

Return on Investment Calculation

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Example 1

Year 0 Year 1 Year 2 Year 3 Total

Total Benefits 45,000 50,000 57,000 152,000
(000’)
Total 100,000 10,000 12,000 16,000 138,000
Costs(000’)

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Example 1

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Return on Investment

• A high ROI suggests that the project’s

benefits far outweigh the project’s cost
• But what constitutes a “high” ROI is unclear
• ROI is a very common test for project
worthiness but…
• It is hard to interpret and should not be used
as the only measure of a project’s worth

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Payback Period/ Breakeven analysis

• This is defined as the number of years it

takes a business/organization to recover its
original investment in the project from net
cash flows

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Example 1- modified

Year 0 Year 1 Year 2 Year 3 Total

Total Benefits 45,000 50,000 57,000 152,000

(000’)
Total 100,000 10,000 12,000 16,000 138,000
Costs(000’)
Net Benefits (100,000) 35,000 38,000 41,000 14,000
(Total Benefits-
Total Costs)

Cumulative Net (100,000) (65,000) (27,000) 14,000

Cash Flow

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Payback Period/ Breakeven analysis

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Payback Period/ Breakeven analysis

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Cash Flow

• Cash is a king!!!
• Cash flow is the blood that keeps the heart of the
kingdom pumping
• Money that is entering and leaving an organization
or business

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Cash Flow
• Money coming in is called cash inflow
• Money going out is called cash outflow

• Cash inflow represent income such as sales, loan

proceeds, investments and the sale of assets

• Cash outflows represent payment of expenses,

salaries, principal debt service, and the purchase
of assets

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Time Value of Money
“A dollar today is worth more than a dollar tomorrow."

• A concept helping us understand the worth of

money in relation to time
• Money is worth more in the present than it is
in the future
• 1M TZS that you can receive in two years
from today does not have the same value as
1M TZS today

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Time Value of Money

• If cash inflows are delayed there is an

opportunity cost
– i.e. what could I have done with the money
• Suppose I had 1M
• If I lend it to a friend (an investment)- what do I
expect to be paid back
• If I could get say 5% from the bank
• I will need at least 1,050,000 in a years time

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 In practice I might want a 1
10% return overall (my opportunity cost)
Opportunity
Return Inflation
cost

Risk

So my friend must repay me 1.1M in 1 year

My 1M will have a value of 1.1M in

one year’s time.

(1.1M is its Future Value)

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Continue……..

A cash Flow of 1.1M in a years time is

equivalent to 1M now

(1.1M has a Present Value of 1M)

We now have a way of converting future cash

flows to a common basis –the Present Value

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Time Value of Money

What will 2M grow to in 3 years if invested at 10%

Year 1 interest 2M x 0.1 = 0.2M Total 2.2M

Year 2 interest 2.2M x 0.1 = 0.22M Total 2.42M
Year 3 interest 2.42M x 0.1= 0.242 Total 2.662M

Or 2M x (1.1)3 =2M x 1.331 = 2.662M

Similarly we can determine what investment is needed so that it

grows to a certain amount.
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Time Value of Money
In general terms then we can say that

P x (1+r)n = F
OR
P= F
(1+r)n

where P = Current or Present Value

F = Future Value
r = prevailing rate of interest
n = number of time periods

We now have a way of converting any cash flow in the future to a present
value so that future cash flows can be compared on a common basis
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Time Value of Money
What is the present value of the following cash flows

1000 in 1 year + 2000 in 2 years + 3000 in 3 years

PV = 1000 + 2000 + 3000

(1.1)1 (1.1)2 (1.1)3

= 909+1652+2253 = 4814

The calculations are made easier by using a spreadsheet or present

value tables. These tables show the value of _1__
(1+r)n

(1000x0.909) + (2000x0.826) + (3000x 0.751) = 4814

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Net Present Value (NPV)

• The NPV is simply the difference between the

total present value of the benefits and the total
present value of the costs

• As long as the NPV is greater than zero, the

project is considered economically acceptable

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Net Present Value Calculation

NET PRESENT VALUE EQUALS

Some amount of money

Divided by

(1 + interest rate)n
Where “n” equals the number of periods
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Steps in performing Economic
Feasibility
1. Identify Costs and Benefits

2. Assign Values to Costs and Benefits

3. Determine Cash Flow

4. Assess Project’s Economic Value

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Any Question???

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Class Activity for Session Five

In your groups, develop a typical table of
contents of a feasibility study report in any IT
project of your choice.

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