preparing the system proposal chapter 13 topics: –systems proposal –determining hardware needs...
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Preparing the System Proposal
Chapter 13
Topics:– Systems proposal– Determining hardware needs– Determining software needs– Decision to rent, lease, or buy– Tangible and intangible costs and
benefits– Methods for selecting alternatives
Preparing the System Proposal
Systems Proposal
• In order to prepare the systems proposal analysts must use a systematic approach to identify hardware and software needs– Ascertaining hardware and software needs– Identifying and forecasting costs and benefits– Comparing costs and benefits– Choosing the most appropriate alternative
Preparing the System Proposal
Steps to Ascertain Hardware and Software Needs
• Inventory computer hardware currently available
• Estimate current and projected workload for the system
• Evaluate the performance of hardware and software using some predetermined criteria
• Choose the vendor according to the evaluation
• Obtain hardware and software from the vendor
Preparing the System Proposal
Steps to Ascertain Hardware and Software Needs
Preparing the System Proposal
Hardware Inventory Check
– Type of equipment: model no., manufacturer
– Status of equipment operation– Estimated age of equipment– Physical location of equipment– Department or person responsible for
equipment
Preparing the System Proposal
Criteria for Evaluating Hardware
• Time required for average transactions (including time for input and output)
• Total volume capacity of the system• Idle time of the central processing
unit• Size of memory provided
Preparing the System Proposal
People that Evaluate Hardware
– Management– Users– Systems analysts
Preparing the System Proposal
Three Options for Obtaining Computer Equipment
– Buying– Leasing– Rental
Preparing the System Proposal
Buying
Advantages Disadvantages
Cheaper than leasing or renting over the long run
Initial cost is high
Ability to change system
Risk of obsolescence
Provides tax advantages of accelerated depreciation
Risk of being stuck if choice is wrong
Full control Full responsibility
Preparing the System Proposal
Leasing
Advantages Disadvantages
No capital is tied up Company doesn’t own the system when lease expires
No financing is required
Usually a heavy penalty for terminating the lease
Leases are lower than rental payments
Leases are more expensive than buying
Preparing the System Proposal
Renting
Advantages Disadvantages
No capital is tied up
No financing is required
Company doesn’t ownthe computer
Easy to change systems
Maintenance andinsurance are usuallyincluded
Cost is very highbecause vendor assumesthe risk (most expensiveoption)
Preparing the System Proposal
Evaluation of Vendor Support for Hardware
• Hardware support – full line of hardware, quality products, warranty
• Software support – complete software needs, custom programming,
warranty
• Installation and training support – commitment to schedule, in-house training, technical
assistance
• Maintenance support – routine maintenance procedures, specified response
time in emergencies, equipment loan while repair is being done
Preparing the System Proposal
Guideline for Evaluating Software
– Performance effectiveness – perform all required and desired tasks, well-designed display screens, adequate capacity
– Performance efficiency – fast response time, efficient input, output, storage of data and backup
– Ease of use – satisfactory user interface, help menu, ReadMe files, flexible interface, adequate feedback, good error recovery
– Flexibility – options for input and output, usable with other software
– Quality of documentation – good organization, adequate online tutorial, Web site with FAQ
– Manufacturer support – tech support hot line, newsletter/email, downloadable product updates
Preparing the System Proposal
Costs and Benefits Analysis
• Systems analysts should take tangible costs, intangible costs, tangible benefits, and intangible benefits into consideration to identify cost and benefits of a prospective system
Preparing the System Proposal
Tangible Costs
• Tangible costs are those that can be accurately projected by systems analysts and the business' accounting personnel
• Examples:– Cost of equipment– Cost of resources– Cost of systems analysts' time
Preparing the System Proposal
Intangible Costs
• Intangible costs are those that are difficult to estimate, and may not be known
• Examples:– Cost of losing a competitive edge– Declining company image
Preparing the System Proposal
Tangible Benefits
• Tangible benefits are advantages measurable in dollars that accrue to the organization through use of the information system
• Examples:– Increase in the speed of processing– Access to information on a more timely
basis
Preparing the System Proposal
Intangible Benefits
• Intangible benefits are advantages from use of the information system that are difficult to measure
• Examples:– Improved effectiveness of decision-
making processes– Maintaining a good business image
Preparing the System Proposal
Selecting the Best Alternative
• To select the best alternative, analysts should compare costs and benefits of the prospective alternatives using– Break-even analysis– Payback– Cash-flow analysis– Present value method
Preparing the System Proposal
Break-Even Analysis
• Break-even analysis is the point at which the cost of the current system and the proposed system intersect
• Break-even analysis is useful when a business is growing and volume is a key variable in costs
Preparing the System Proposal
Break-Even Analysis
Preparing the System Proposal
Payback Period (PBP)
• Payback determines the number of years of operation that the system needs to pay back the cost of investing in it
• Payback is determined in one of two ways:– By increasing revenues– By increasing savings
• If the PBP of a project is 6 years and the project can exist 3 years in the fast technology change situation—it should be rejected.
Preparing the System Proposal
How to determine PBP
• PAY BACK PERIOD (PBP)Investment: $ 20,000Amount Recovered in 2002: $ 7,312Remaining Investment to be recovered: $12,668Amount Recovered in 2003: $ 7,768Remaining Investment to be recovered: $ 4,920
Part of 2004 Needed : 4,920/7352= 0.67 (Assuming that Amount Recovered in 2004 is
$7352)
PBP = 1 + 1 + 0.67 = 2.67 YEARS
Preparing the System Proposal
Payback Period
Preparing the System Proposal
Three Drawbacks of the Payback Method
– It is strictly a short-term approach to investment and replacement decision
– It does not consider the importance of how repayments are timed
– It does not consider total returns from the proposed systems project that may go well beyond the payback year
Preparing the System Proposal
Cash-Flow Analysis
• Cash-flow analysis is used to examine the direction, size, and pattern of cash flow associated with the proposed information system
• Determines when a company will begin to make profit
• Determine when cash outlays and revenues will made up for initial investment
Preparing the System Proposal
Cash-Flow Analysis
Preparing the System Proposal
Present Value Method
• Assess all the economic outlays and revenues of the information system over its economic life and to compare costs today with future costs and today's benefits with future benefits
• Use present value when the payback period is long, or when the cost of borrowing money is high
Preparing the System Proposal
Present Value Method
Without considering present value
Considering present value
Preparing the System Proposal
Guidelines for Selecting the Best Alternative
– Use break-even analysis if the project needs to be justified in terms of cost, not benefits or if benefits do not substantially improve with the proposed system.
– Use payback when the improved tangible benefits form a convincing argument for the proposed system.
– Use cash-flow analysis when the project is expensive relative to the size of the company.
– Use present value when the payback period is long.