Cost-Benefit-Analysis (3).pptx

Cost Benefit Analysis

1. Cost-Benefit Analysis (CBA) System Analysis and Design

2. Cost Benefit Analysis (CBA) a relatively simple and widely used technique for deciding whether to make a change. As its name suggests, you simply add up the value of the benefits of a course of action, and subtract the costs associated with it. Costs are either one-off, or may be ongoing. Benefits are most often received over time. Is an economic evaluation technique that measures all the positive (beneficial) and negative (costly) consequences of an intervention or program in monetary terms.

3. Cost Benefit Analysis (CBA) cont. Cost - is the value of money that has been used up to produce something, and hence is not available for use anymore. Benefit - are the monetary values of desirable consequence of economic policies and decisions.

4. Categories of CBA Tangible Costs Tangible cost and benefits is quantitative. They are identified and measured Examples: Hardware costs, salaries for professionals, software cost , personnel training, and employee salaries are example of tangible costs. 

5. Categories of CBA cont. Intangible Costs Costs whose value cannot be measured. Examples: Effort put in learning a new IS and associated process The cost of breakdown of an online system during banking hours will cause the bank lose deposits. Employees’ resistance to new processes/IS Lower customer satisfaction due to improperly performing IS Limitations in decision making when a new IS cannot deliver reports managers need to make decisions. * Note that some intangible costs may result in tangible costs.*

6. Categories of CBA cont. Tangible Benefits are those measured in monetary terms can be estimated quite accurately. Examples: savings on labor expenses savings due to reduced process time (e.g., reducing inventory costs in supply chain process) savings due to avoiding to add more employees when improved process/IS can carry a larger volume of operations Paper and postage cost reductions Reduced stock obsolescence Automated ordering and payment, lowering payment processing and paper costs

7. Categories of CBA cont. Intangible Benefits difficult or impossible to quantify. Examples: more customer satisfaction, improved company status Improvement in the appearance of reports and other business documentation (better quality but no more money). Increased knowledge capabilities (note: these are a condition for making more attractive products, but before this products are made and sold no monetary gains accrue).

8. Categories of Costs Recurring Costs refer to any expense that is known, anticipated, and occurs at regular intervals. Regular cost incurred repeatedly, or for each item produced or each service performed. Non-recurring one-of-a-kind expenses that occur at irregular intervals and thus are sometimes difficult to plan for or anticipate from a budgeting perspective. One time costs.

9. Non-Recurring Costs Development Cost (Project costs) Personnel costs Equipment costs Storage Devices Training cost Facility costs Cabling and installation ...more that can be classified to one time costs

10. Recurring Costs Operating Cost Supplies Personnel salary System Software licenses, updates and maintenance Storage Devices On-going training Consultant services IT staff that maintain and operate the system Facility costs ...more that can be classified to as recurring costs

11. Discounted Rate = (1+r)ⁿ PV = savings per year /discounted rate per year NPV = sum of previous years pvs + current year pv -one time cost Overall NPV = NPV of all savings per year-NPV of all cost per year