Description
First, study the following PPT on financial analysis (NPV, ROI, etc..
Then work on the following problems:
In Chapter 6, you learned that Campus Bikes is a popular bicycle shop located near a major university. The shop sells several brands of new bikes, including everything from high-end racing models to beach cruisers. In addition to sales of new bikes and accessories, Mark’s service department is always busy. The staff includes Mark himself, a bookkeeper, two part-time sales reps, a full-time mechanic, and several part-time service helpers who assemble bikes.
Background
Until now, the owner, Mark Turner, kept the business records on his personal computer. He created a simple database to keep track of inventory, but it is not always up-to-date. He also developed spreadsheets to track expenses and payroll. The business has grown and Mark wants to install a new computer system to handle all business functions.
You are a lab assistant in the computer information department at the college. You earned a computer science degree at a two-year school, and you recently decided to work toward your four-year degree. Mark recently asked you to help him plan a system for Campus Bikes. You used an object-oriented approach to create a model of the business functions and actors involved.
Now Mark wants you to do a “make or buy” analysis. Specifically, you will look into the pros and cons of in-house development versus purchase of a software package. Your research indicates that the most popular bike shop package is offered by a vendor called BikeData.
In your last meeting, Mark said that tangible savings for a new system would be hard to measure, but improved customer care, better service department records, and increased productivity are expected. Mark estimates that these benefits will add up to about $3,000 per year, whether the system is developed in-house, or purchased from BikeData.
You decide to compare relative costs to establish a total cost of ownership (TOC) over the useful life of the system. Based on your research, you put together the following summary:
Costs for Option A: Develop In-house
The system will have a six-year useful life, be very flexible, and easiest to maintain.
It will cost $15,000 to develop, install, and configure the system, and $1,000 to load
existing data.
Mark and the bookkeeper can handle day-to-day support with no added expense.
Costs for Option B: Purchase BikeData Software Package
This is a vertical package with a four-year useful life.
The software is less flexible than an in-house system and some customizing will be needed.
It will cost $8,000 to purchase, $1,500 to install and configure, $2,500 to load existing
data, and $1,000 additional hardware will be needed
Support is free for the first year, then there is a $2,000 annual fee
Benefits for Both Options: $3,000 per year
Tasks
Prepare a detailed list of pros and cons of in-house versus software purchase.
Calculate ROI for both options.
Calculate NPV for both options. Use an 8% discount factor.
The present value formula is PV = FV/(1 + i) n where PV = present value, FV = future value, i = decimalized interest rate, and n = number of periods.
Create a PowerPoint presentation for Mark showing the results of your analysis, including recommendations and reasons.
Name your file in the following format [Assignment_Cost_Benefit_Analysis]_[YourFirstName]_[YourLastName]. (e.g. Assignment_Cost_Benefit_Analysis_Bob_Lee). Submit a PPT file with answers to the questions before the due date.
Please review the PPT on Financial Analysis Tools as it contains detailed information on how to do the tasks. The following is an example on a similar case that you can refer to:
Unformatted Attachment Preview
Toolkit C – The Systems Analyst’s Toolkit
Financial Analysis Tools
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Define economic feasibility
Classify costs and benefits into various
categories, including tangible or intangible,
direct or indirect, fixed or variable, and
developmental or operational
Understand chargeback methods and how
they are used
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2
Use payback analysis to calculate the length
of time that it takes for a project to pay for
itself
Use return on investment analysis to measure
a project’s profitability
Use present value analysis to determine the
value of a future project measured in current
dollars
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or duplicated, or posted to a publicly accessible website, in whole or in part.
3
Systems analyst is required to review a
project’s costs and benefits at the end of each
SDLC phase
◦ Helps management decide on continuing or
terminating the project
Identifying and classifying all costs and
benefits is important
Determining economic feasibility requires
considering the project’s benefits compared
to the total cost of ownership (TCO)
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or duplicated, or posted to a publicly accessible website, in whole or in part.
4
FIGURE C-1 Amazon.com offers a calculator to compare the TCO of running
applications on-premises or in the cloud using AWS.
Source: Amazon Web Services, Inc.
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or duplicated, or posted to a publicly accessible website, in whole or in part.
5
Cost Classifications
◦ Tangible costs – Costs to which a specific dollar
value can be assigned
Example – Interest charges paid on borrowed money
◦ Intangible costs – Costs whose dollar value cannot
be calculated easily
Examples – Cost of customer dissatisfaction and lower
employee morale
◦ Direct costs: Costs that can be associated with the
development of a specific system
Examples – Salaries of project team members and the
purchase of hardware
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or duplicated, or posted to a publicly accessible website, in whole or in part.
6
◦ Indirect costs (overhead expenses): Cannot be
attributed to the development of a particular
information system
Examples – Salaries of network administrators, copy
machine rentals, and insurance expenses
◦ Fixed costs: Costs that are constant and do not
depend on a level of effort
Examples – Salaries and hardware rental charges
◦ Variable costs: Vary depending on the level of
activity
Examples – Costs of printer paper, supplies, and
telephone charges
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or duplicated, or posted to a publicly accessible website, in whole or in part.
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◦ Developmental costs: Costs that are incurred once,
at the time the system is developed or acquired
Examples – Salaries of people involved in systems
development, and software purchases
◦ Operational costs – Incurred after the system is
implemented and continue while the system is in use
Examples – System maintenance and ongoing training
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or duplicated, or posted to a publicly accessible website, in whole or in part.
8
Managing Information Systems Costs and
Charges
◦ Direct costs are easier to identify and predict than
indirect costs
◦ Chargeback methods: Use accounting entries to
allocate the indirect costs of running the IT
department
No charge method
Fixed charge method
Variable charge method based on resource usage
Variable charge method based on volume
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or duplicated, or posted to a publicly accessible website, in whole or in part.
9
Benefit Classifications
◦ Benefits can be classified as tangible or intangible,
fixed or variable, and direct or indirect
◦ Alternative benefit classification related to the
nature of the benefits
Positive benefits increase revenues, improve services,
or contribute to the organization as a direct result of
the new information system
Cost-avoidance benefits: Expenses that would be
necessary if the new system were not installed
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or duplicated, or posted to a publicly accessible website, in whole or in part.
10
Process of comparing the anticipated costs of
an information system to the anticipated
benefits
Payback Analysis
◦ Process of determining how long it takes for an
information system to pay for itself
◦ Payback period: Time taken to recover the system’s
cost
◦ Steps to perform payback analysis
Determine the initial development cost of the system
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11
Estimate annual benefits and determine annual
operating costs
Compare total development and operating costs to the
accumulated value of the benefits produced by the
system to find the payback period
FIGURE C-2 The costs of a typical
system vary over time. At the beginning,
system costs are high due to initial
development expenses. Costs then drop
during systems operation. Maintenance
costs begin to increase until the system
reaches the end of its economically useful
life.
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or duplicated, or posted to a publicly accessible website, in whole or in part.
12
FIGURE C-3 Benefits of an
information system change over time,
as shown in the upper graph. The
lower graph shows costs and benefits
plotted on the same graph. The
dashed line indicates the payback
period, when accumulated benefits
equal accumulated costs.
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or duplicated, or posted to a publicly accessible website, in whole or in part.
13
FIGURE C-4 Payback
analysis data for two
information systems
proposals: Project A and
Project B.
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or duplicated, or posted to a publicly accessible website, in whole or in part.
14
Using a Spreadsheet to Compute Payback
Analysis
◦ Step 1 – Design the worksheet and label the rows
and columns
◦ Step 2 – Entering the cost and benefit data for each
year and the formulas
Payback analysis requires a formula to display
cumulative totals, year by year
◦ Step 3 – Verify that the spreadsheet operates
properly
◦ Step 4 – Create a line chart displaying the
cumulative costs, benefits, and payback period
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or duplicated, or posted to a publicly accessible website, in whole or in part.
15
FIGURE C-5 A Microsoft Excel
worksheet displays payback analysis
data for Project A in the upper screen.
When cumulative cost and benefit
formulas are entered, the finished
worksheet in the lower screen appears.
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or duplicated, or posted to a publicly accessible website, in whole or in part.
16
FIGURE C-6 Microsoft Excel can be
used to show the payback period by
creating a chart of cumulative costs
and benefits. Note that Project A has
a shorter payback period than
Project B.
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or duplicated, or posted to a publicly accessible website, in whole or in part.
17
Return on Investment Analysis (ROI)
◦ Percentage rate that measures profitability
Compares the total net benefits (the return) received
from a project to the total costs (the investment) of the
project
◦ ROI = (total benefits – total costs) / total costs
◦ Considers costs and benefits over a longer time
span than payback analysis
◦ Projects are usually expected to meet or exceed a
minimum ROI
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or duplicated, or posted to a publicly accessible website, in whole or in part.
18
FIGURE C-7 Return
on investment
analysis for Project A
and Project B shown
in Figure C-4.
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or duplicated, or posted to a publicly accessible website, in whole or in part.
19
Using a Spreadsheet to Compute ROI
FIGURE C-8 Sample
ROI worksheet. Notice
that cell E13 contains
the ROI formula.
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or duplicated, or posted to a publicly accessible website, in whole or in part.
20
Present Value Analysis
◦ Based on the concept of time value of money
◦ Present value of a future dollar
Amount of money that, when invested today at a
certain interest rate, grows to exactly one dollar at a
certain point in the future
Discount rate – Specified interest rate
Present value tables: Contain adjustment factors for
various interest rates and numbers of years
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or duplicated, or posted to a publicly accessible website, in whole or in part.
21
FIGURE C-9 Portion of a present value table showing adjustment factors for various time periods and
discount rates. Values in the table are calculated using the formula shown in the text. Notice how the
factors decrease as time and percentage increase.
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or duplicated, or posted to a publicly accessible website, in whole or in part.
22
FIGURE C-10 The CCH Business Owner’s Toolkit offers a small business guide, and a
wide range of financial tools, including guidance on calculating net present value.
Source: CCH Incorporated
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or duplicated, or posted to a publicly accessible website, in whole or in part.
23
FIGURE C-11 Net present
value analysis for Project A
and Project B. The tables use
discount factors from external
sources, such as the CCH
site shown in Figure C-10.
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or duplicated, or posted to a publicly accessible website, in whole or in part.
24
Using a Spreadsheet to Calculate Present
Value
FIGURE C-12 The top screen shows
how to use discount factors to calculate
present value in a Microsoft Excel
spreadsheet. In this case, the present
value of benefits is $79,160. The
bottom screen shows an example of
the NPV function, which is a menudriven formula that is built into Excel.
The slight difference between the
values is because Excel uses more
decimal places.
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or duplicated, or posted to a publicly accessible website, in whole or in part.
25
A systems analyst must be concerned with
economic feasibility throughout the SDLC
Classification of project costs
◦ Tangible or intangible, direct or indirect, fixed or
variable, and developmental or operational
Common chargeback approaches
◦ No charge, a fixed charge, a variable charge based
on resource usage, or a variable charge based on
volume
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or duplicated, or posted to a publicly accessible website, in whole or in part.
26
Classification of system benefits
◦ Tangible or intangible, fixed or variable, direct or
indirect, and positive or cost-avoidance
Approaches to cost-benefit analysis
◦ Payback analysis determines the time it takes for a
system to pay for itself, which is called the payback
period
◦ Return on investment analysis measures a system by
comparing net benefits to total costs
◦ Present value analysis adjusts the value of future costs
and benefits to account for the time value of money
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or duplicated, or posted to a publicly accessible website, in whole or in part.
27
Capstone Case: New Century Health Clinic
c
Background
Based on your earlier recommendations, New Century decided to continue the systems
development process for a new information system. Now, at the end of the systems analysis
phase, you are ready to prepare a system requirements document and give a presentation to the
New Century associates. Many of the proposed system’s advantages were described during the
fact-finding process. Those include smoother operation, better efficiency, and more user-friendly
procedures for patients and New Century staff.
You also must examine tangible costs and benefits to determine the economic feasibility of
several alternatives. If New Century decides to go ahead with the development process, the main
options are to develop the system in-house or purchase a vertical package and configure it to
meet New Century’s needs. You have studied those choices and put together some preliminary
figures. You know that New Century’s current workload requires six hours of office staff
overtime per week at a base rate of $15 per hour. In addition, based on current projections, New
Century will need to add another full-time clerical position in about six months. Neither the
overtime nor the additional job will be needed if New Century implements the new system. The
current manual system also causes an average of three errors per day, and each error takes about
20 minutes to correct. The new system should eliminate those errors. You estimate that by
working full-time you could complete the project in about 12 weeks. Your consulting rate, which
New Century agreed to, is $35 per hour. If you design the new system as a database application,
you can expect to spend about $2,500 for a networked commercial package. After the system is
operational and the staff is trained, New Century should be able to handle routine maintenance
tasks without your assistance.
As an alternative to in-house development, a vertical software package is available for about
$12,000. The vendor offers a lease-purchase package of $4,000 down, followed by two annual
installments of $4,000 each. If New Century buys the package, it would take you about four
weeks to install, configure, and test it, working full-time. The vendor provides free support
during the first year of operation, but then New Century must sign a technical support agreement
at an annual cost of $600. Although the package contains many of the features that New Century
wants, most of the reports are pre-designed and it would be difficult to modify their layouts.
No matter which approach is selected, New Century probably will need you to provide about
10 hours of initial training and support each week for the first three months of operation. After
the new system is operational, it will need routine maintenance, file backups, and updating.
These tasks will require about four hours per week and can be performed by a clinic staff
member. In both cases, the necessary hardware and network installation will cost about $12,500.
In your view, the useful life of the system will be about five years, including the year in which
the system becomes operational.
You are scheduled to deliver a presentation to New Century next week, and you will submit a
system requirements document at that time. To prepare yourself, you reviewed the skills
described in Part A of the Systems Analyst’s Toolkit, and you listed tips to remember, as
follows:
Presentation Tips
•
•
•
•
•
Use suitable visual aids.
Use presentation software, if possible.
Distribute handouts before, during, or after the presentation.
Follow the guidelines in Part A of the Systems Analyst’s Toolkit.
Keep your presentation to 30 minutes, including 5 minutes for questions.
System Requirements Document Tips
• Follow the guidelines in Part A of the Systems Analyst’s Toolkit.
• Include charts, graphs, or other helpful visual information in the document. Also include
other material to help the audience understand the new system and decide on the next step.
• Spell check and carefully proofread the entire document.
• For readability, try to keep the Flesch Reading Ease score above 60, and aim for a FleschKincaid Grade Level of 8.0 to 9.0.
Tasks
1. Provide an overview of the proposed system, including costs and benefits, with an
explanation of the various cost-benefit types and categories.
Stress that organizing the cost and benefit data is a very important step, because these
economic factors directly will affect the new system’s feasibility and future development. A
sample analysis follows. Also explain that each company has its own way of calculating
costs and benefits, and some approaches are more conservative than others. For example,
some companies will not count savings unless there is an actual reduction in out-of-pocket
costs. In other firms, the saved hours represent a valuable asset that can be recognized and
accounted for — and it is management’s job to see that the potential savings are achieved
by doing more work, other work, or better quality work.
A sample analysis follows. The table outlines the tangible costs and benefits that are
described in the Background statement on page 295 of the textbook.
Note: Operational costs and benefits are estimated at 50 percent during Year 0, and full
impact thereafter. Also, the instructor may wish to change these assumptions to simulate a
different situation.
A preliminary worksheet follows. The numbers themselves are not the critical issue – the
main goal is for students to grasp the methodology, and transform this data into an
analytical spreadsheet.
Cost or Benefit
Financial Impact
Description of Cost or Benefit
Eliminate three hours of
overtime each week at
$15 per hour
Annual savings of 6 hours * $15
hourly rate * 52 weeks * 1.5
overtime factor = $7,020 (six
months of impact, or $3,510, will
be available in Year 0)
Avoidance of annual cost of 40
hours * $15 hourly rate * 52
weeks = $31,200 (six months of
impact, or $15,600, will be
Direct, operational, variable,
positive benefit
Eliminate need for
additional position in six
months
Direct, operational, variable,
cost-avoidance benefit
Cost or Benefit
Eliminate daily errors
For in-house option:
consultant’s time to
develop system
For in-house option:
networked commercial
database software for inhouse development
For package option:
vertical software package
from vendor
For package option:
consultant’s time to
install, configure, and test
vendor package
For package option:
vendor tech support
contract
Clinic staff time to
perform maintenance, file
backups, and updating
Consultant’s time to
provide initial training
and support
Hardware requirements
Financial Impact
available in Year 0)
Potential annual savings of 1
hr./day = 1 * $15 hourly rate * 5
days * 52 weeks = $3,900 (six
months of impact, or $1,950, will
be available in Year 0)
$35 hourly rate * 40 hours * 12
weeks = $16,800
Description of Cost or Benefit
Direct, operational, variable,
positive benefit
Direct, developmental, fixed cost
$4,200
Direct, developmental, fixed cost
$4,000 in Year 0, followed by 2
annual payments of $4,000, for a
total of $12,000
$35 hourly rate * 40 hours * 4
weeks = $5,600
Direct, developmental, fixed cost
Annual cost of $600 after first
year of operation
Direct, operational, fixed cost
Annual cost of 4 hours * $15
hourly rate * 52 weeks = $3,120
(six months of cost impact, or
$1,560, will be incurred during
Year 0)
$35 hourly rate * 10 hours * 13
weeks = $4,550
Direct, operational, fixed cost
$12,500
Direct, developmental, fixed cost
Direct, developmental, fixed cost
Direct, developmental, fixed cost
2. Develop an economic feasibility analysis, using payback analysis, ROI, and present value
(assume a discount rate of 10%).
Answers will vary, depending on how students interpret the Background statement on page
295 of the textbook. Sample solutions follow. The first step is to prepare a cost-benefit
summary with data from the table shown above. Students can refer to the table in Part C of
the Systems Analyst’s Toolkit to determine the 10 percent discount rate.
The sample cost-benefit summary was created using Microsoft Excel. Again, the numbers
themselves are not the critical issue – the main goal is for students to grasp the
methodology.
A more detailed breakdown follows, with data values assigned for both options. If time is
an issue, the instructor might choose to begin at this point, and use the figure as a
“standard” starting point.
Payback analysis follows:
ROI analysis follows:
NPV analysis follows:
3. Prepare a context diagram and diagram 0 for the new system.
Students can use the diagrams they developed in the Chapter 5 assignments for the New
Century case study. Sample diagrams can be found in the End-of-Chapter solutions for
Chapter 5.
4. Provide a brief explanation of the various alternatives that should be investigated if
development continues, including in-house development and any other possible strategies.
Chapter 7 presents an extensive discussion of development strategies. These include Webbased software trends, outsourcing options (such as application service providers and
Internet business service providers), and in-house development (including building,
purchasing, or customizing a software package, and user applications).
Students should mention each alternative and cite the main advantages and
disadvantages of each. The New Century case study does not provide factual details about
outsourcing or user applications, but students can use their imagination or the instructor
can supply an additional fact statement for these areas. The main objective is to practice
analytical skills in evaluating several different alternatives.
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