financial analysis tools toolkit c

Systems Analysis and Design 9th Edition

Toolkit CFinancial Analysis Tools

Toolkit Objectives

• 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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Toolkit Objectives

• 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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Introduction

• You need to know how to calculate costs and benefits when you conduct preliminary investigations, evaluate IT projects, and make recommendations to management

• Financial analysis tools are important throughout the systems development life cycle

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Describing Costs and Benefits

• Economic feasibility• Total cost of ownership (TCO)

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Describing Costs and Benefits

• Cost Classifications– Tangible costs– Intangible costs– Direct costs– Indirect costs or overhead expenses

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Describing Costs and Benefits

• Cost Classifications– Fixed costs– Variable costs– Developmental costs– Operational costs

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Describing Costs and Benefits

• Managing Information Systems Costs and Changes– Chargeback method1. No charge method• Cost center

2. Fixed charge method• Profit center

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Describing Costs and Benefits

• Managing Information Systems Costs and Changes3. Variable charge method based on resource

usage• Resource allocation• Connect time• Server processing time

4. Variable charge method based on volume

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Describing Costs and Benefits

• Benefit Classification– You must classify the benefits that the company

expects from a project– Like costs, benefits can be classified as tangible or

intangible, fixed or variable, and direct or indirect– Positive benefits– Cost-avoidance benefits

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Cost-Benefit Analysis

• Cost-benefit analysis• Many cost-benefit analysis techniques exist• Three most common methods: payback

analysis, return on investment analysis, and present value analysis

• The objective is the same: to provide reliable information for making decisions

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Cost-Benefit Analysis

• Payback Analysis– Payback period– Carry out the following steps• Determine the initial development cost of the system• Estimate annual benefits• Determine annual operating costs• Find the payback period

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Cost-Benefit Analysis

• Payback Analysis

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Cost-Benefit Analysis

• Payback Analysis

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Cost-Benefit Analysis

• Using a Spreadsheet to Compute Payback Analysis– First step is to design the worksheet and label the

rows and columns– After entering the cost and benefit data for each

year, you enter the formulas– You will need a formula to display cumulative

totals, year by year

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Cost-Benefit Analysis

• Return on Investment Analysis

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Cost-Benefit Analysis

• Using a Spreadsheet to Compute ROI– Use cumulative columns but you also will need

two overall totals– The last step is to add a formula to calculate the

ROI percentage rate– If your data changes, you can modify your

worksheet and calculate a new result instantly

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Cost-Benefit Analysis

• Present Value Analysis– Time value of money– Present value analysis– Present value– Present value tables– Net present value (NPV)

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Cost-Benefit Analysis

• Present Value Analysis– In theory, any project with a positive NPV is

economically feasible– Can also be used to compare and rank projects– Provides solutions to the shortcomings of payback

analysis and return on investment analysis

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Cost-Benefit Analysis• Using a Spreadsheet to Calculate Present

Value

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Toolkit Summary

• Must be concerned with economic feasibility throughout the SDLC

• Must classify project costs as tangible or intangible, direct or indirect, fixed or variable, and developmental or operational

• Every company must decide how to charge or allocate information systems costs and the chargeback method

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Toolkit Summary

• You must also classify system benefits• Present value analysis adjusts the value of

future costs and benefits to account for the time value of money

• Many companies use present value analysis to evaluate and rank projects

• Toolkit C complete

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