Feasibility Study and Feasibility Analysis

Feasibility Study:

Describes and evaluates the candidate systems and helps in the selection of best system that meets the system performance requirements.

System performance definition

The system’s required performance is defined by describing its output’s in the user-acceptable format.

It involves 3 steps:◦ Statement of constraints.

◦ Identification of specific system objectives. Find the benefits of the system

◦ Description of outputs.

Feasibility Analysis

“A measure of how beneficial or practical the development of a software system will be to an organization.

This analysis recurs throughout the life cycle.”

Feasibility Checkpoints

ProductionSystem

TechnicalDesign

BusinessRequirements

Existing System Planned ProjectPlanning

Support

Implementation Design

Analysis

Feasibility Checkpoints

systems analysis -- study◦ urgency? rough cost estimate

systems analysis -- definition◦ clearer scope, refined cost estimate

systems design -- selection◦ adjust scope, schedule, costs

systems design -- procurement◦ option check before letting contracts

systems design -- detail design◦ one last chance to cancel or downsize

STEPS IN FEASIBILITY ANALYSIS

Note down deficiencies in current system found while preparing SRS Document

Set goals to remove deficienciesQuantify GoalsFind alternative solutions to meet goalsEvaluate feasibility of alternative solutions

taking into account constraints on resources.Rank order alternatives and discuss with

user.Prepare a system proposal for management

approval

STEPS IN FEASIBILITY ANALYSIS contd..

Quantify the goals and sub-goals from the verbal statement of goalFor example: Send bill soon after month end

Quantified statement of the same goal:Send bill within 5 days of month end

Find out whether it is possible to meet these goals.

Determine the cost of meeting each goalFind cost benefit if quantified

Project Feasibility

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

Tests of feasibility

1. Technical--can system be developed?2. Operational--can organization absorb the

change?3. Economic--what is business justification?4. Schedule--can system be implemented in time

available?5. Legal -- copyrights, anti-trust laws

Technical Feasibility

Is the technology or solution practical?

Do we currently possess the necessary technology?

Do we possess the necessary technical expertise?

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TechnologyTechnology

Operational Feasibility

Is the problem worth solving?

Will the solution to the problem work?

How do the end-users and managers feel about the problem (or solution)?

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Legal Feasibility

copyrights, anti-trust laws (systems that share data

across organizations), financial reporting requirements, contractual obligations, software ownership, outsourcing arrangements, etc.

Schedule Feasibility

Can the project deadlines be met?

What will it cost to accelerate development?

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Economic Feasibility

The most important is cost-benefit analysis.Cost estimates

◦ acquisition or development costs◦ operation and maintenance costs

Benefit estimates◦ tangible benefits◦ intangible benefits

Cost-Benefit Analysis

Developing an IT application is an investment. Since after developing that application it

provides the organization with profits. Profits can be monetary or in the form of an

improved working environment. However, it carries risks, because in some

cases an estimate can be wrong. And the project might not actually turn out to

be beneficial.Cost benefit analysis helps to give

management a picture of the costs, benefits and risks.

It usually involves comparing alternate investments.

Cost benefit determines the benefits and savings that are expected from the system and compares them with the expected costs.

The cost of an information system involves the development cost and maintenance cost.

The development costs are one time investment whereas maintenance costs are recurring.

The development cost is basically the costs incurred during the various stages of the system development.

Each phase of the life cycle has a cost.

Some examples are :PersonnelEquipmentSuppliesOverheadsConsultants' fees

Cost and Benefit Categories

There are several cost factors/elements. These are hardware, personnel, facility, operating, and supply costs.

In a broad sense the costs can be divided into two types

1. Development costs-Development costs that are incurred during the development of the system are one time investment.◦ Equipment

2. Operating costse.g. , Wages

SuppliesOverheads

Alternative classification of the costs:

Hardware/software costs:◦ It includes the cost of purchasing or leasing

of computers and it's peripherals. ◦ Software costs involves required software

costs.Personnel costs:

◦ It is the money, spent on the people involved in the development of the system.

◦ These expenditures include salaries, other benefits such as health insurance, conveyance allowance, etc.

Facility costs:◦ Expenses incurred during the preparation of

the physical site where the system will be operational.

◦ These can be wiring, flooring, acoustics, lighting, and air conditioning.

Operating costs:◦ Operating costs are the expenses required for

the day to day running of the system. ◦ This includes the maintenance of the system. ◦ That can be in the form of maintaining the

hardware or application programs or money paid to professionals responsible for running or maintaining the system.

Supply costs:◦ These are variable costs that vary

proportionately with the amount of use of paper, ribbons, disks, and the like.

◦ These should be estimated and included in the overall cost of the system.

Benefits

We can define benefit asProfit or Benefit = Income - Costs

Benefits can be accrued by :- Increasing income, or- Decreasing costs, or- both

Benefits can be tangible or intangible, direct or indirect.

In cost benefit analysis, the first task is to identify each benefit and assign a monetary value to it.

The two main benefits are improved performance and minimized processing costs.

Further costs and benefits can be categorized as:1. Tangible or Intangible Costs and Benefits

◦ Tangible cost and benefits can be measured. ◦ Hardware costs, salaries for professionals,

software cost are all tangible costs. ◦ They are identified and measured..◦ The purchase of hardware or software,

personnel training, and employee salaries are example of tangible costs.

◦ Costs whose value cannot be measured are referred as intangible costs.

◦ The cost of breakdown of an online system during banking hours will cause the bank lose deposits.

Benefits are also tangible or intangible. ◦ For example, more customer satisfaction,

improved company status, etc are all intangible benefits.

◦ Whereas improved response time, producing error free output such as producing reports are all tangible benefits.

Both tangible and intangible costs and benefits should be considered in the evaluation process.

2. Direct or Indirect Costs and Benefits

◦ From the cost accounting point of view, the costs are treated as either direct or indirect.

◦ Direct costs are having rupee value associated with it.

◦ Direct benefits are also attributable to a given project.

◦ For example, if the proposed system that can handle more transactions say 25% more than the present system then it is direct benefit.

◦ Indirect costs result from the operations that are not directly associated with the system.

◦ Insurance, maintenance, heat, light, air conditioning are all indirect costs.

3. Fixed or Variable Costs and Benefits◦ Some costs and benefits are fixed. ◦ Fixed costs don't change. ◦ Depreciation of hardware, Insurance, etc are

all fixed costs.

◦ Variable costs are incurred on regular basis. ◦ Recurring period may be weekly or monthly

depending upon the system. ◦ They are proportional to the work volume and

continue as long as system is in operation.

◦ Fixed benefits don't change. ◦ Variable benefits are realized on a regular

basis.

Example: Performing Cost Benefit Analysis (CBA)

Cost for the proposed system ( figures in USD Thousands)

Benefit for the propose system

Profit = Benefits - Costs= 300, 000 -154, 000= USD 146, 000

Select Evaluation Method

When all the financial data have been identified and broken down into cost categories, the analyst selects a method for evaluation of cost and benefits.

There are various analysis methods available. Some of them are following.

Present value analysisPayback analysisNet present valueNet benefit analysisCash-flow analysisBreak-even analysis

Present value analysis: It is used for long-term projects where it is

difficult to compare present costs with future benefits.

In this method cost and benefit are calculated in term of today's value of investment.

To compute the present value, we take the following formula

Where, i is the rate of interest & n is the timeExample: Present value of $3000 invested at

15% interest at the end of 5th year is calculates as

P = 3000/(1 + .15)5

= 1491.53

Net Benefit and Net Present Value

The net benefit value is equal to total benefits minus total costs.

Net Benefit Value=Costs - Benefits

Net Present Value- is expressed as percentage of the investment and given by:

% = Net Benefit Value/Investments

Example: Suppose total investment is $50000 and benefits are $80000

Then Net Benefit Value = $(80000 - 50000)= $30000

Net present value-% = 30000/80000=.375

Break-even Analysis:

Once we have determined what is estimated cost and benefit of the system it is also essential to know in what time will the benefits are realized.

For that break-even analysis is done.Break -even is the point where the cost of

the proposed system and that of the current one are equal.

Break-even method compares the costs of the current and candidate systems.

In developing any candidate system, initially the costs exceed those of the current system. This is an investment period.

When both costs are equal, it is break-even. Beyond that point, the candidate system

provides greater benefit than the old one. This is return period.

Pay-Back Analysis Consider a five year investment whose cash flow

consequences are summarized in the table below. The primary data for payback calculation are the expected cash inflows and outflows from the investment: 

Cash Inflows: The investment will bring $300 cash inflow each year, for years 1 - 5.

Cash outflows: The initial cost of the investment is a cash outflow of $800 in year 1, followed by a cost (outflow) of $150 in year 2. There are no expected costs in years 3 - 5.

We know that payback(return) occurs in Year 4 because cumulative cash flow is negative at the end of Year 3 and positive at the end of Year 4.

But where, precisely, is the payback event in Year 4?

The answer can be seen roughly on a graph, showing the payback event as the "break even" point in time, when cumulative cash flow crosses from negative to positive:

Using the tabled data above, where the payback year is clearly Year 4, payback period can be calculated (estimated) as follows;

Payback Period = Y + ( A / B ) where◦ Y = The number of years before final

payback year. In the example, Y = 3.0 years. ◦ A = Total remaining to be paid back at the

start of the payback year, to bring cumulative cash flow to 0. In the example, A = $50.

◦ B = Total (net) paid back in the entire payback year. In the example, B = 300.

For the example,Payback Period = 3+ (50) / (300)Payback Period = 3 + 1/6 = 3.17 Years

Cash-Flow analysis:

Some projects produce revenue after investing in computer systems mainly the projects based on computer and word processing services.

Cash flow analysis keeps track of accumulated costs and revenues on regular basis.