Cost-Benefit Analysis in Project Management, Lecture notes of Computer Science

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3.10 Cost-Benefit Analysis • Cost/benefit analysis, comparing

• Expected costs – Expected benefits
  • Issues
    • Estimating costs – Estimating benefits
      • Use of financial models to evaluate For Exclusive Use of EECS811 Students Saiedian © 2007

3.10 Cost-Benefit Analysis Cost Estimation • Estimate costs to compare with benefits/other

investment options

• Overall estimation based on
  • Estimation of required activities (structure) – Estimation for each activity – Estimation of installation/setup cost – Estimation of operational cost
    • Difficult, as a lot of these are`estimates’; estimation errors cascade For Exclusive Use of EECS811 Students Saiedian © 2007

3.10 Cost-Benefit Analysis Operational Costs • Costs of operating the system once it has

been installed

• Support costs – Hosting costs – Licensing costs – Maintenance costs – Backup costs For Exclusive Use of EECS811 Students Saiedian © 2007

3.10 Cost Benefits Analysis Direct Benefits • Directly accountable to new system

• Cost savings ( e.g., less staff, less paper, quicker turnaround)
  • Money generation (e.g., new revenue stream, new markets) - Measurable after system is operational • Have to be estimated for cost/benefit analysis For Exclusive Use of EECS811 Students Saiedian © 2007

• Positive side effects of new system• External system (e.g., increase branding, entry to new markets) - Internal system (increased interest in job for users, enabler for other systems) - Often very specific to a project; not measurable even after a system is operational - Part of strategic decision rather than cost/benefit analysis

3.10 Cost Benefits Analysis Intangible Benefits For Exclusive Use of EECS811 StudentsSaiedian © 2007

3.11 Cash Flow Forecasting • Indicates when expenditure and income

will take place For Exclusive Use of EECS811 Students Saiedian © 2007

3.11 Cash Flow Forecasting Example of Cash Flow Forecasts Year

• Chapter 3 ProgrammeManagement andProjectEvaluation McGraw-Hill Education ISBN 0-07-710989-9
• 3.10 Cost-Benefit Analysis Cost Category • Development costs • Setup costs • Operational costs For Exclusive Use of EECS811 Students Saiedian ©
• 3.10 Cost-Benefit Analysis Setup Cost • Hardware and software infrastructure • Recruitment/staff training • Installation and conversion costs For Exclusive Use of EECS811 Students Saiedian ©
• 3.10 Cost Benefits Analysis Benefits Types • Direct benefits • Indirect benefits • Intangible benefits For Exclusive Use of EECS811 Students Saiedian ©
• Project
• Project
• Project
• Project
• -100,
• -1,000,
• -100,
• -120,
• 10,
• 200,
• 30,
• 30,
• 10,
• 200,
• 30,
• 30,
• 10,
• 200,
• 30,
• 30,
• 20,
• 200,
• 30,
• 30,
• 100,
• 300,
• 30,
• 75,
• 50, Net Profit
• 100,
• 50,
• 75,
• For Exclusive Use of EECS811Students Saiedian ©

3.12 Cost-Benefit EvaluationTechniques [1/2] • Costs and benefits have to be expressed

using the same scale to be comparable

• Usually expressed in payments at certain times (cash flow table) - Payments at different points in time are not comparable based only on theamount For Exclusive Use of EECS811 Students Saiedian © 2007

3.12 Cost-Benefit Evaluation Techniques Net Profit • Difference between total cost and total income • Pros: Easy to calculate

• Cons
  • Does not show profit relative to size investment (e.g., consider Project 2) - Does not consider timing of payments (e.g., compare Projects 1 and 3) - Not very useful other than for "back of envelope" evaluations For Exclusive Use of EECS811 Students Saiedian © 2007

3.12 Cost-Benefit Evaluation Techniques Payback Period • Time taken to break even • Pros

• Easy to calculate – Gives some idea of cash flow impact
  • Cons: Ignores overall profitability • Not very useful by itself, but a good measure for cash flow impact For Exclusive Use of EECS811 Students Saiedian © 2007