Economic Feasibility

1. Development Costs
2. Operational Costs
3. Tangible Benefits
4. Annual benefits
5. Scalability and upgradability
6. Intangible Benefits

1. Payback Analysis
   1. determining if and when an investment will pay for itself
      1. calculates the period within which the investment will be recovered.
   2. Payback period

      Annotations:

      • the period of time that will lapse before accrued benefits overtake accrued and continuing costs.    
   3. Payback Period = Net Investment / Average Annual Cash Flow
   4. Ignores inflation and rate of interest
2. Return On Investment
   1. comparing alternative investment opportunities
   2. Ignores inflation and rate of interest
   3. Return on Investment (ROI) = Annual Profit / Investment
   4. Calculates the annual rate of return or profit from the investment
3. Discounted Cash Flow Techniques
   1. Net Present Value
      1. All future cash flows are adjusted to present value
      2. Net present value = Original Investment + Current value of all future cash flows
         1. NPV < 0 / NPV > 0

            Annotations:

            • In the case of multiple investments and returns, the NPV of all returns should be greater than the NPV of all investments – so the project is profitable    
   2. Annuity and Net Present Value
   3. Internal Rate of Return
   4. Time Value of Money
   5. Interest
      1. Paid to compensate for the depreciation in money value
      2. Simple Interest: Interest is not re-invested
         1. Interest = Principal x Rate of Interest x Time (PxRxT=I)
      3. Compound Interest: Interest is added to the principal and re-invested
         1. Interest = Principal [(1 + Rate)n – 1]
   6. Future Value of Money
      1. The future value of an investment after periods (n) of time is:
         1. Future Value = Principal + Compound Interest
         2. Future Value = Principal x (1 + Rate)n

Annotations:

• assessing the appropriateness of an investment, based on the projected flow of costs, and the benefits expected to result from the investment.    

1. Appropriateness of investment

   Annotations:

   • to be assessed based on the above    
2. projected flow of costs
   1. outlay of cash required

      Annotations:

      • Any outlay of cash required for the initial purchase or maintenance of the investment at any point during the investment’s useful life.    
   2. opportunity costs
   3. Identifying Costs
      1. Determine monetary value and timing of project costs

         Annotations:

         • both immediate and on-going    
      2. Consider both direct and indirect project costs.
      3. Agree with project sponsor on how to deal with indirect or intangible costs.
      4. Document all assumptions

         Annotations:

         • —to be clarified, or vague areas identified 
      5. Identify alternatives
   4. Full Cost of Systems
      1. Cost of the software, initial purchase and updates
      2. Cost of any additional hardware requirements
      3. Cost of ongoing systems support, internal and external
      4. Cost of initial training and any refresher training
      5. Costs associated with having to forego other activities

         Annotations:

         • that could have either saved money or increased revenues while staff are engaged in the project    
   5. Area that Costs That Will Arise
      1. People
      2. Hardware
      3. Software
      4. Data/Processes
      5. Networking
      6. Documentation
   6. Developing the project cash flow schedule
      1. Determine the evaluation horizon – usually three to five years
      2. Determine the time periods (years or months) to be used
      3. Allocate anticipated costs and benefits across the schedule
      4. Calculate net cash flow for each time period
3. benefits expected to result from the investment.
   1. Any returns

      Annotations:

      • Any returns to the organization resulting from the investment that occur at any time during the investment’s useful life.    
      • e.g.  —Reductions in current costs Increased capacity to generate new revenue generating output    
   2. Identifying the Benefits
      1. Identify the project benefits
      2. Work with the project sponsor
      3. project goals and objectives

         Annotations:

         • Primary sources
      4. Start with expected tangible benefits
         1. Determine monetary value and timing
         2. Document all assumptions
      5. Discuss how intangible benefits are to be presented.
      6. Transform intangibles to tangibles (sometimes).
4. Limitations
   1. under-estimate actual costs.
   2. over-estimate cost savings.
   3. Most estimates of staff reductions are never realized
   4. Most cost-benefit analyses ignore the value of new opportunities.