417 LAB ACTIVITY 2B: Working With Feasibility Analysis

WHY:

This activity is designed to help your team do its initial operational, technical, schedule and economic feasibility evaluation of the project and also practice the three approaches to cost benefit analysis. Feasibility analysis must be repeated at various points in the analysis and design of your project throughout the semester, each time becoming more specific and realistic. Knowledge of cost benefit analysis is critical for a successful systems analyst and also for anyone who must decide whether or not to approve a project.

LEARNING OBJECTIVES:

  1. Discover how to apply the different aspects of project feasibility.
  2. Understand the time value of money.
  3. Discover how to do cost benefit analysis using Quattro Pro.

PERFORMANCE CRITERIA:

  1. Quality of the answers to the Critical Thinking Questions.
  2. Accuracy of your cost benefit analysis worksheet.

INFORMATION:

Feasibility
the measure of how beneficial or practical the development of an information system will be to an organization.

Operational Feasibility
the measure of how well the solution of problems will work in the organization. (Is the problem worth solving?) It is also a measure of how people feel about the system project.

Technical Feasibility
a measure of the practicality of a specific technical solution and the availability of technical resources and expertise.

Schedule Feasibility
a measure of how reasonable the projected timetable is.

Economic Feasibility
a measure of the cost effectiveness of a project or solution. It takes into account costs and benefits. Thus it is often called Cost-Benefit Analysis.

Costs can be divided into development costs (one-time costs to set up a system) and operating costs (ongoing costs after system has been placed in operation). Operating costs are either fixed (same or nearly the same every month, quarter, year, etc.) and variable (vary in proportion to some usage factor - i.e. production costs, hourly workers wages, supplies, etc.).

Benefits can be divided into tangible benefits (those that are easily quantified - change in savings for the firm after the system is implemented) and intangible benefits) (those which are almost impossible to quantify - customer goodwill, employee morale, better service, etc.).

Time Value of Money. Money changes value over time because of the interest paid for the use of money. To receive a fixed amount of money from an investment several years from now you need to invest a smaller amount today. this smaller amount is called the present value of the amount to be received in the future. Interest is the cost associated with the use of money for a specific period of time. There are two types - simple and compound - but cost benefit analysis always assumes that compound interest is being used.

Compound interest is the interest cost for two or more periods if we assume that after each period the interest gained is added to the amount on which interest is computed in future periods. Compound interest can be computed by realizing that if we start with a principal amount P and invest it at a periodic interest rate I, then the amount of the investment after n periods is P(1 + I)n. The difference between P(1 + I)n and P is the amount of compound interest received.

The difficulty with cost benefit analysis is that some of the costs and most of the benefits will occur in the future, while the development costs must be paid in the present. We try to determine what each of the future costs and benefits are worth now (their present values) so that valid comparisons can be made. If F is the future amount then we know from above that F = P(1 + I)n. If we want to know the present value, we solve for P to obtain P = F/(1 + I)n. (Note that the book's formula on page 653 is wrong.) If we assume that F is 1, we can determine the present value rates for a dollar and multiply these rates by the actual future cost or benefit to get the present value. The table on page 654 gives the present values for a dollar for various rates of interest.

RESOURCES:

  1. Module C, Systems Analysis and Design Methods
  2. Your project assignment sheet;
  3. Quattro Pro for Windows Help and Coaches;
  4. 45 minutes

PLAN:

  1. Choose roles if you have not already done so.
  2. Evaluate the operational, technical, and schedule feasibility of your project. (See Critical thinking Questions 1 - 3).
  3. List as many as you can of the cost and benefit categories that you envision your project will entail (c.f. pages 649-651).
  4. Use Quattro Pro to solve problems 8, 9, and 10 on page 661.

MODEL:

Figures C.2 - C.5 from Module C.

CRITICAL THINKING QUESTIONS:

  1. As best you can determine, is your project operationally feasible? Why?

  2. As best you can determine, is your project technically feasible? Why?

  3. As best you can determine, is your project schedule feasible? Why?

  4. What was the payback period, the return on investment, and the net present value of the new production scheduling system from problems 8 - 10? Was it a good investment?

  5. Which is a better standard to measure economic feasibility: payback period, return on investment, or net present value? Why?
CPSC 417 Lab Activity 2B -- Revised 9/2/98

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