Summary

1. Data analysis is a prerequisite to cost/benefit analysis. From the anal.' sis, system design requirements alternative system and me identified evaluated. The analysis of the costs and benefits of each alternative\ guides the selection prose. Therefore knowledge of cost and benefit tegories and evaluation methods is important.

  2. In developing cost estimates, we need to consider hardware, personnel, facility, operating, and supply costs. In addition, a system is expected to provide benefits. We need to identify each benefit and assign it a monetary value for cost/benefit analysis.

   3. Cost/benefit analysis gives a picture of the various costs, benefits, and rules associated with each alternative system. The procedure entails:

   a. Identifying the costs and benefits pertaining to a project.

   b. Cate90tizing the various costs and benefits for analysis.

   c. Selecting a method of evaluation.

   d. Interpreting the results of the analysis.

   e. Taking action.

  4. Costs and benefits are classified as tangible 01' intangible, direct or indirect, fixed or variable:

   a. Tangible costs: Outlays of cash for an item or activity.

   b. Intangible costs: Those that have financial values not easily measured.

   c. Direct costs: Those where a dollar figure can be directly associated. with a project.

   d. Indirect costs: The results of operations not directly associated with a system or activity.

   e. Fixed costs: They are constant and do not change-nonrecurring. 

   f . Variable costs: They are proportional to work volume.

   5. When all financial data have been identified, the analyst must select a method of evaluation. Them are several methods available:

   a. Net benefit analysis: Involves subtracting total costs from total benefits. its  is easy to calculate, interpret, and present. The main draw­ back is not· accounting for the time value of money and not discounting future cash flows.

   b. Present value analysis: Calculates the costs and benefits of the system in terms of today's value of the investment and then compares.

   c. Net present value: Discounted benefits minus discounted costs. It is relatively easy to calculate and accounts for the time value of money.

   d. Payback analysis: A common measure of the relative time value of a project. It determines the time it takes for the accumulated benefits to equal the initial investment. It is easy t.0 calculate and allows the ranking of two or activities.

  e. Break-even analysis: The point at which the cost of the candidate system and that of the current one are equal.

  f. Cash-flow analysis: Keeps track of accumulated costs and revenues on a regular basis.

 6. Once the evaluation of the project is complete, actual results are compared against standards 01' alternative investments. The decision to pt an alternative system can be highly subjective, depending on the analyst or user's confidence in the estimated cost and benefit values and the magnitude of the investments.