Feasibility Study in Planning and Budgeting System by wxh16939

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									Systems Development
    Dr. Yan Xiong
  College of Business
   CSU Sacramento

        10/12/03
        Agenda
•   Systems Development
    Life Cycle (SDLC)
•   Systems Development
    Planning
•   Feasibility Analysis
Front -end Systems Planning
Systems Development
Life Cycle (SDLC)
   Systems Development Life
    Cycle (SDLC) phases
    • Systems analysis
    • Conceptual design
    • Physical design
    • Implementation and conversion
    • Operations and maintenance
SDLC
 Each phase broken down
  into several steps or tasks
 Each step has:

    Start date
    End date
    Product (deliverable)
 Steps may be repeated
  (Waterfall Model)
Systems Development
Life Cycle
     Systems Analysis
   Do initial investigation    Feasibility
                               analysis and
     Do system survey          decision points
     Do feasibility study
Determine information needs
  and system requirements
Deliver systems requirements
Feasibility Analysis
 Traditionally, done once at
  project beginning, then forgotten
 Should be redone after each
  SDLC stage
 SDLC costs increase exponentially
  through each succeeding phase
 Project uncertainty (# unknowns)
  decreases with each SDLC stage
            SDLC Costs and Unknowns
                  Project
                 Unknowns                 Project
                                          Costs
Magnitude




                     TIME (SDLC Phases)
Feasibility Analysis
 Forget about sunk costs!
   they are the past
   Alaska state personnel system
 So, at end of each SDLC phase

   conduct new feasibility analysis
   now fewer unknowns than before
   make decision of whether or not to
    proceed with SDLC
Systems Development
Life Cycle
    Conceptual Design
   Identify and evaluate        Feasibility
                                analysis and
     design alternatives        decision points
Develop design specifications
 Deliver conceptual design
       requirements
Systems Development
Life Cycle
    Physical Design
     Design output         Feasibility
                           analysis and
    Design data base       decision points
      Design input
   Develop programs
  Develop procedures
     Design controls
Deliver developed system
 Systems Development
 Life Cycle
Implementation / Conversion
          Develop plan             Feasibility
                                   analysis and
 Install hardware and software     decision points
Train personnel, test the system
   Complete documentation
Convert from old to new system
     Fine-tune and review
  Deliver operational system
Systems Development
Life Cycle
Operation and Maintenance
      Operate system
      Modify system
 Do ongoing maintenance
 Deliver improved system

                            Systems
                            Analysis
Participants
•   Management
•   Accountants
•   IT Steering Committee
•   Project development team
     • systems analysts and
       programmers
•   External players
     • customers
     • vendors
Accountants’ Roles
•   Determine own
    information needs
•   Members of project
    development team
•   Play active role in designing
    system controls
•   Help perform feasibility
    (ROI) analyses
Steering Committee
•   Set policies that govern AIS
•   Ensure top-management
    participation
•   Monitor and control
•   Facilitate coordination and
    integration of IS activities
•   At Intel, called Management
    Review Committees (MRC)
        Agenda
•   Systems Development
    Life Cycle (SDLC)
•   Systems Development
    Planning
•   Feasibility Analysis
Development Planning
   Need for planning
–   consistency
–   efficiency (no duplication)
–   lower costs
–   ensure meet overall
    project goals
     – time
     – money
     – system objectives
Planning Techniques
 Several techniques discussed
  in textbook, such as
    CPM
    PERT
 For most AIS projects,
  CPM and PERT are “over-kills”
 Most commonly used is Gantt chart
Gantt Chart
 Bar chart with project
  activities listed on left-hand
  side; time units (days or weeks)
  across top
 For each activity, bar drawn from
  scheduled starting date to ending
  date
 As activities completed,
  bar filled in
 Can use $ units instead of time
      Gantt Chart Structure
______________________________________________
   Activity            Week Starting
______________________________________________
 1
______________________________________________
 2
______________________________________________
3
______________________________________________
4
______________________________________________
5
______________________________________________
6
______________________________________________
7
______________________________________________
8
______________________________________________
 Augmented Gantt Chart
 TASK      PERSON     %      BY
                    COMPLT MONTH
System
Descript
Reqrmnt
Analysis
Cost-
Benefit
Augmented Gantt Chart
     TASK      February   March   April

    System
    Descript
    Reqrmnt
    Analysis
    Cost-
    Benefit
        Agenda
•   Systems Development
    Life Cycle (SDLC)
•   Systems Development
    Planning
•   Feasibility Analysis
Feasibility Analysis
 Systems analysis is first
  step in (SDLC)
 Feasibility study (also
  called business case) prepared
  and updated as necessary during
  remaining steps in SDLC
 Steering committee uses study to
  decide whether to terminate
  project, proceed unconditionally, or
  proceed conditionally
Initial Feasibility
 Analysis
 Technical feasibility:
  Can system be developed
  using existing technology?
 Operational feasibility: Will the
  system be used by people in the
  organization?
 Legal feasibility: Will there be
  conflicts with organization’s ability
  to discharge its legal obligations?
Initial Feasibility
 Analysis
 Scheduling feasibility:
  Can system be implemented
  in time allotted?
 Economic feasibility: Will
  benefits of the proposed system
  exceed its estimated costs?
Feasibility Analysis
 Economic feasibility is
  most frequently analyzed
 Basic framework for
  feasibility analysis is capital
  budgeting model
   – payback period
   – net present value (NPV)
   – internal rate of return (IRR)
Feasibility Analysis
 Repeated after each stage
 Why?

   project cost increases
    exponentially as project
    moves through SDLC
   even if sunk costs in prior stages,
    cost-beneficial to abort project
    before next stage if $ aren’t there
 Testing example
Information System Costs
   Categories
     Hardware
     Software
     People
     Supplies
     Telecommunications
     Physical Site
Info System Costs (cont.)
  When costs occur
     One-time (development)
     Recurring (operational)
  Indirect costs

     Overhead (e.g., utilities)
     Marginal costs
       actual out-of-pocket
Out-of-Pocket Costs
 Clerk performs 20 hours
  per week on task
 System reduces this by 10 hours

 Clerk earns $12 an hour

 Savings $120 per week

 What’s wrong with this picture?
Estimating Costs
 Keep forecasts simple
 Explain your logic

 Rely on credible sources

 Downplay intuition (hunches)

 Use other people

 Build in contingency (fudge) factor
Estimating Costs
   Principle of Insufficient Reason
     If don’t have facts,
       assume nothing
     e.g., hardware costs have
       increased 10% per year        -
       absent any facts assume 10%
       increase next year
Methods For
Comparing Systems
 Costs first, then benefits
 $ first, then qualitative factors

 Methods:

    Break-even Analysis
    Payback Period
    Discounted Payback Period
Break-even Analysis
 Intersection of
    Investment Period
    Return Period
 When start receiving
  positive cash flow
 Surplus funds to be
  invested by Year X
     Break-even Point
               Investment
                                       Old
                 Period
                                      System
                                      New
 $                                   System
                            Return
                            Period
Break-even      Years
  Point
Payback Period
 Where development costs
  offset by operational savings
  of new system
 Graphic solution

 Feasibility Matrix
                              Development
                              And Operational
    Payback Period            Areas are Equal

                                       Old
                                      System
                                      New
$     Develop                        System
       Costs
                    Operational
                      Costs
                Years      Payback
                            Period
   Feasibility Matrix
 Type Year      Year Year      Year
 Cost     1        2   3        4
 Current 62       65  70        76
 System
  New    162     100 33         35
 System      ** **
 Differ- -100     -35 +37      +41
 ence
** Includes one-time development costs
New System Costs
 While in development:
   Development costs (e.g.,
    programming) spread throughout
    development period (e.g., 18 months)
   Old System operational costs UNTIL
    new system implemented
 Example:

   18 month development
          New System Costs
    Year         1      2        3    4
Develop-       100     50
 ment
Old System      62     33
Operating                   **
New System             17        33   35
Operating                   **

  Total         162    100       33   35
** ½ year old system, ½ year new system
     Calculating Payback Periods
     Type Cost      Year      Year      Year        Year
                     1         2         3           4
     Difference    -100       -35       +37         +41

 Cumulative        -100       -135      -98          -57
 Difference
                                         **          ***
**       Difference positive - Includes Breakeven Point

***      Cumulative Difference not yet positive –
         Payback Period beyond 4 years
Calculations
 Assumption: All costs occur
  equally by month across each year
    Principle of Insufficient Reason
 $120K annual expenditure = $10K
  expenditures per month
 For Break-even Point, calculation based
  on Difference row
 For Payback calculation, calculation
  based on Cumulative Difference row
Calculations
Payback = Year Last +             A
 Period   Negative           A   + B
          Cumulative
          Difference


A = Cumulative Difference Last Negative Year
B = Cumulative Difference Next Year After Negative

NOTE: Same for Break-even, except that you use
 Difference Row rather than Cumulative Difference
Calculations
    Type           Year   Year     Year
    Cost            3      4        5

   Difference      +37    +41      +62
   Cumulative
   Difference      -98    -57      +5


Previous Year was           Last Negative Year
Last Negative Year          For Payback Period
For Break-even Point
Calculations
     Type           Year       Year      Year
     Cost            2          3         4

   Difference       -35        +37       +41
   Cumulative
   Difference       -135       -98        -57


Break-even Point = 2 + (35) / (35 + 37) = 2.48 years
Calculations
     Type           Year     Year       Year
     Cost            3        4          5

   Difference      -37        +41       +62
   Cumulative
   Difference      -98        -57       +5


Payback Period = 4 + (57) / (57 + 5) = 4.92 years
Present Value of Money
 But profit-seeking firm could
  earn money on development
  funds invested today
 Return on Investment (ROI)

 Present Value of Money =

   1 / (1 + ROI) ** n
 n = number of years into future

 Net Present Value (NPV) = sum of each
  future years present values
Discounted Payback Period
 Don’t use for Break-even Point
   There is no such thing as a
    Discounted Break-even Point
 Add 2 new rows to Feasibility Matrix

   Discount Rate
     (1 – i) to the power of the year
   Discounted Cumulative Difference
     Discount Rate times Cum Diff
Example
 Assume 20% ROI
   Average last 3 years
 For 1st year:

  Discount = 1 / (1+.2)**1 = .83
 For 2 year:
       nd

  Discount = 1 / (1+.2)**2 = .69
    Year 3      Year 4    Year 5
     .58        .48        .40
 Calculating Payback Periods
               1     2         3

Difference   -100   -35    +37
 Discount
(ROI = .2)    .83   .69        .58
Discounted
Difference    -83   -25    +22
Cum Disctd
Difference    -83   -108       -86
 Calculating Payback Periods
                 4        5            6

Difference     +41        +67        ???
 Discount
(ROI = .2)      .48       .40        ???
Discounted
Difference     +20        +27        ???
Cum Disctd
Difference      -66       -39        ???
   No payoff in 5 years       6th year???
Topics Discussed
•   Systems Development
    Life Cycle (SDLC)
•   Systems Development
    Planning
•   Feasibility Analysis

								
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