HINF 351 - Chapt. 6 Cost/Benefit Analysis

Explain step 4. compare alternatives

need to compare alternatives, however, need to discount back to todays dollars

Explain step 3. quantify costs and benefits

using different methods to quantify intangibles

Explain step 1. define the problem

-in depth analysis of the situation, needs and requirements of an IT -objectives

What are the several common criteria used to make comparisons?

1. benefit/cost ratio: present value of benefits divided by the present value of costs 2. net present value of net benefits: present value of benefits minus the present value of costs discounted back to the present 3. internal rate of return (IRR): discount rate that would make the NPV of an investment equal to 0 (trial and error) 4. payback period

What are the 5 categories for benefits?

1. cost savings or avoidance 2. error reduction 3. improved operational performance 4. increased flexibility 5. improved planning and control

What are the steps on cost/benefit analysis?

1. define problem 2. identify costs and benefits 3. quantify costs and benefits 4. compare alternatives 5. perform sensitivity analysis

What are the ways to manage intangible costs and benefits?

1. ignore them 2. conduct the cost/benefit analysis without them but list them and describe their potential effects in an addendum 3. utilize a surrogate measure for the intangible and include the effect directly into the cost/benefit analysis 4. conduct a survey to determine its value 5. shadow prices - estimates the value (not recommended)

How should the 4 criteria be used?

1. maximize the ratio of benefits over costs 2. maximize net present value of net benefits 3. maximize internal rate of return 4. shortest payback period

What is cost/benefit analysis?

Cost/benefit analysis involves identifying costs and benefits for each alternative investment, discounting the costs and benefits back to the present, and selecting the best alternative according to a prespecified criterion

What are the 3 types of cost/benefit analysis?

Cost/benefit analysis may be used for ex ante (i.e., before project analysis), ex post (i.e., after project analysis) and in medias res (i.e., in progress analysis) investment evaluations

What is cost/effectiveness analysis?

another cost-analysis technique that considers costs and effects that are defined in different terms -difference is the unit of measure

Explain step 5. sensitivity analysis

defined as a means of determining the reliability of the decision generated from a cost/benefit analysis (degree of error)

Explain step 2. identify costs and benefits

find tangible and intantangible costs and benefits