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

Project Feasibility

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

Feasibility Analysis

• It is the process by which feasibility is measured.

• The objective of assessing feasibility is to determine whether a development project has a reasonable chance of success.

• It is the process of selecting the best system that meets the following requirements.   

Requirements

•       The user has recognised a need.•      User requirements are determined and

the problem has been defined.•     An initial investigation is launched to

study the existing system and verify the problem.

• The analyst has verified the objective constraints and required output

Five Areas Of Risk

• Economic Feasibility

• Organizational and cultural feasibility

• Technology Feasibility

• Operational Feasibility

• Schedule Feasibility

• Resource Feasibility

Economic FeasibilityIt is a measure of the cost effectiveness of a project or

a solution.It consists of two tests:        If the anticipated value of the benefits greater

than projected cost of development        Does the organisation have adequate cash flow

to fund the project during the development period? A new system must increase income, either through

cost savings or by increased revenues. And this is determined by cost/benefit analysis.

Organisational & Cultural Feasibility

        A currently low level of computer competency        Substantial computer phobia        A perceived loss of control by staff or

management        Potential shifting of political & organisational

power due to the new system.        Fear of change of job responsibilities        Fear of loss of employment        Reversal of long standing work procedures.

Technology FeasibilityA new system brings a new technology into a company.

The new technology could be:        A state-of-art of technology        Existing technology with new configuration        Lack of expertise within the company Technical feasibility looks at what is practical and

reasonable. It addresses three major issues.        Is the proposed technology practical        Do we currently possess the necessary technology        Do we have necessary expertise & is the schedule

reasonable. 

Technology Feasibility

Once the risks are identified, the solution provided, which could be

        Additional training

        Hiring consultants

        Hiring more experienced employees.

Schedule Feasibility• Some projects are initiated with specific

deadlines.

• It is required to determine if the deadline is desirable or mandatory.

• If the deadline is mandatory then penalty could be associated with missing such a deadline.

• If deadline is desirable then the analyst can propose alternative schedule.

Operational FeasibilityIt is a measure of how well the solution will work in the

organisation. It is a measure of how people feel about the

system/project.It measures the urgency of the problem or acceptability

of a solution. There are two aspects of operational feasibility to be

considered:        Is the problem worth solving        How do the end user and management feel about

the problem 

Resource Feasibility• The project management must assess the

availability of resources for the project. • Development projects require the involvement of

system analysts, system technicians and users. And one risk is that the required people may not be available to the team when needed.

• An additional risk is that the people who are assigned may not have the necessary skills.

• And continual risk that member might leave the team.

Cost/Benefit Analysis The cost/benefit analysis is a three-step process. 1.      Estimate the anticipated development and

operational cost. Development costs are those that are incurred during

the development of the new system. And operational costs are those that will be incurred

after the system have been put into production.2.      Estimate the anticipated financial benefits.

Financial benefits are the expected annual savings or increases in revenue derived from the installation of the new system.

3.      The cost/benefit analysis is calculated based on detailed estimates of costs and benefits.

Step-1:Development Cost

The cost of developing an information system can be classified according to the phase in which they occur.

System development costs are usually onetime costs that will not recur after the project has been completed.

Many organisations have standard cost categories that must be evaluated

        Salaries and wages – The salaries of system analyst, programmers, consultants, data entry personnel, computer operators, secretaries and the like who work on the project make up the personnel costs.       

Development Cost• Equipment and installation – Computer time

will be used for one or more of the following activities:

• programming, testing, conversion, maintaining project dictionary,

• prototyping, loading data etc. • This cost could also include charges for

computer resources such as disk storage, report printing.    

Development Cost

• Software and license        Consulting fees and payment to third

parties        Training        Facilities        Utilities and tools        Support staff        Travel and miscellaneous

Operational Costs

Operating costs tend to recur throughout the lifetime of the system.

The cost of operating a system over its useful lifetime can be classified as fixed and variable.

 Fixed Costs occur at regular intervals but at relatively fixed rates. E.g.

        Lease payment and software license payments        Prorates salaries of information system

operators and support personnel 

Operational Costs        Variable Costs occur in proportion to some

usage factors. E.g.:        Cost of computer usage (i.e. CPU time used,

terminal connect time used, storage used), which vary with the workload.

• Supplies (pre-printed forms, printer paper used, punched cards, floppy disks, magnetic tapes and other expendables), which vary with workload.

        Prorated overhead costs (utilities, maintenance, and telephone service) which can be allocated throughout the lifetime of the system using standard techniques of cost accounting.

Step-2 Benefits

Benefits normally increase profits or decrease cost, both highly desirable characteristics of a new information system.

Benefits are classified as tangible or intangible

Tangible BenefitsThey are those that can be easily qualified. Tangible benefits are usually measured in terms of

monthly or annual savings or profit of the firm. They can be measured or estimated in terms of money and that accrue to the organisation.Fewer processing errorsIncreased throughputDecreased response timeElimination of job stepsIncreased salesReduced credit lossesReduced expenses

Intangible BenefitsThey are those benefits believed to be difficult or

impossible to qualify. Unless these benefits are at lease identified, it is entirely

possible that many projects would not be feasible. These are benefits that accrue to the organisation but

that cannot be measured quantitatively or estimated accurately.Improved customer goodwillImproved employee moralBetter service to communityBetter decision-making

STEP 3:Financial Calculations• The financial calculations are based on “The Time Value

of Money” concept i.e. a dollar today is worth more than a dollar one year from now.

• The time value of money is extremely important in evaluation processes.

• Say, for an opportunity that generates $3000 a year, how much is needed to invest.

• Obviously one would like to invest less than $3000. To earn the same money five years from now, the amount of investment would be even less.

• The time value of money is usually expresses in form of interest on the funds invested to realise the future value

Formula-F = P( 1 + i )n WhereF = Future value of an investmentP = Present value of investmentI = Interest rate per compounding periodN = Number of years$3000 invested in Treasury notes for three years @ 10% interest

would have a value at maturity of  F = $3000(1 + 0.1) 3

= $3000(1.33)= $3993

 There are three popular techniques to assess economic feasibility:        Net Present Value        Payback Technique        Return on Investment

NPVIt is the present value of dollar (i.e. money) benefits and

costs for an investment such as a new system.The two concepts of net present value (NPV) are1.      All benefits and costs are calculated in terms of

today’s money i.e. present value2.      Benefits and costs are combined to give net value The future stream of benefits and costs is netted together

and then discounted by a certain factor for each year in the future.

The discount rate is the annual percentage rate that an amount of money is discounted to bring it to a present value.

NPV To compute present value, we take the formula for

future value i.e. F = P( 1 + i )n

ThusP = F/( 1 + i )n

So, the present value $1500 invested at 10% at the end of forth period is

P = 1500/(1 + 0.1) 4

= 1500/1.61 =1027.39

 Thus, if we invest 1027.39 today we can expect to have 1500 after 4 years.

Payback Analysis The Payback Analysis technique is simple and popular

method used to determine if and when an investment will pay for itself.

Because system development costs are incurred long before benefits begin to accrue, it will take a long time for the benefits to overtake the costs.

After implementation there are additional expenses that must be covered.

Payback analysis determines how much time will lapse before accrued benefits overtake accrued and continuing costs i.e. Payback Period or Breakeven Point.

It is defined as the time period at which the accumulated cash flow (including capital expenditures) becomes positive.

Example

$20,000 is being invested in two proposals

Proposal A: Positive net cash flow of $3200 annually for the first 7 years.

Proposal B: Net cash flow Year 1 -$2000, Year2 $2675, Year 3 $3200, Year 4 $4550, Year 5 $6550, Year 6 $7000,Year 7 $8000

Compare the proposals using payback method

SolutionYear Flow in Year Cumulative

cash flow at year end

0 -20000 -20000

1 -2000 -22000

2 2675 -19325

3 3200 -16125

4 4550 -11575

5 6550 -5025

6 7000 1975

7 8000 9975

Comparison

Proposal A: Payback Period = 20000/3200 = 6.25 years

Proposal B will recover the initial cost before end of year 6. If we assume that the $7000 net cash inflow occurs in 12 equal monthly cash inflows, it will be nearly ninth month of the year before payback is achieved i.e. approximately 5.75 years

Return on Investment Analysis

It is a measure of the percentage gain received from an investment such as a new system.

The ROI for a solution or project is percentage return needed (like an interest rate) so that the costs and benefits are exactly equal over the specified time period.

  Lifetime ROI = (Estimated Lifetime benefits – Estimated lifetime costs)/

(Estimated Lifetime costs) 

ROI-3 Periods

• When a system is being developed, initial costs is high i.e. it is an investment period.

• When both costs are equal, it is break-even.

• Beyond that point, the new system provides greater benefit (profit) than the old system. This is the return period.