Feasibility and Cost- Benefit Analysis
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Ans.: Feasibility study is an outcome of the preliminary investigation and determination whether the system requested is feasible or not. It requires the need for a rigorous feasibility study.
Following are the different types of feasibility, but they are interrelated :
Technical Feasibility : This is concerned with specifying equipments and software that will successfully satisfy the user requirements, investigating whether the technology exists to implement the proposed system, or whether this is a practical proposition.
Operational Feasibility : Operational feasibility is concerned with whether the current work practices and procedures are adequate to support the new system. It is also concerned with social factors - how the organizational change will affect the working lives of those affected by the system.
Economic Feasibility : The procedure is to determine the benefit and savings that are expected from a proposed system. Economic feasibility has to do with establishing the cost-effectiveness of the proposed system - if the benefits do not outweigh the costs, then it is not worth going ahead. The process used for economic feasibility is cost benefit analysis.
Management Feasibility : Management feasibility is determination of whether a proposed system will be accepted by management people.
Social Feasibility : Social feasibility is determination of whether a proposed system will be acceptable to the people or not. .This determination typically examines the probability of the project being acceptable by the group directly affected by the proposed system change.
Legal Feasibility : Legal feasibility is a determination of whether a proposed project infringes on known Act, status, as well as any pending legislation.
Time Feasibility : Time feasibility is a determination of whether a proposed project can be implemented fully within time frame. If a project takes too much time it is likely to be rejected.
Cost - Benefit Analysis : Since the cost plays an important role in deciding the new system, it must be identified and estimated properly. Benefits of different type can be grouped on the basis of advantages they provide to the management. Benefits of a project include four types:
Cost Saving Benefits : Leads to reductions in administrative and operational costs, example reduction in the clerical staff.
Cost Avoidance Benefits : Those which eliminate future administrative and operational costs, example no need to hire additional staff in future to handle administrative activity.
Improved Service Level Benefits : Those where the performance of a system is improved by new computer based method, example registering a student in fifteen minutes rather than 30 minutes.
Improved Information Benefit : Those where computer based methods lead to better information for decision making. A system that reports most-improved fifty customers, as measured by an increase in sales is an improved-information.
Categories of Costs and Benefits : The cost associated with the system are expenses, outlays or losses arising from developing and using the system.
Costs and Benefits can be classified as follows :
a) Tangible or Intangible Costs and Benefits : Tangible refers to ease with which costs or benefits can be measured. An outlay of cash for any specific item or activity is referred to as a tangible cost.
Costs that are known to exist but their financial value cannot be exactly measured are referred to as intangible costs. The estimation is only an approximation. For example Employee movable problem because of installing new system is an intangible cost.
Tangible benefits such as computer jobs in fewer hours or producing error free reports are quantifiable. Intangible benefits such as more satisfied customers or an improved corporate image because of using new system are not easily quantified.
b) Direct and Indirect Costs & Benefits : direct costs are those which are directly associated with a system. They are applied directly to operator.
Direct benefits also can be especially attributable to a given project. For example, a new system that can process 30 percent more transaction per day is a direct benefit.
Indirect costs are not directly associated with a specific activity in the system. They are often referred to as overhead expenses, e.g. cost of space to install a system, maintenance of computer center, light are tangible costs but it is difficult to calculate the proportion of each attribute to a specific activity such as a report.
Indirect benefits are realized as a by-product of another system, e.g. a system that takes sales calls on customer provides an indirect marketing benefit by giving additional information about competition.
c) Fixed or Variable Costs & Benefits : Some costs and benefits remain constant, regardless of how a system is used. Fixed are considered as sunk costs. For e.g. the purchase of equipment for a computer center is called as fixed cost as it remains constant whether equipment is being used extensively or not.
Variable costs are incurred on a regular basis they are generally proportional to work volume and continue as long as the system is in operation. For example the cost of computer forms varies in proportion to amount of processing.
Fixed benefits also remain constant. By using a new system, if 20 % of staff members are reduced, we can call it a fixed benefit. Variable benefits, on the other hand, are realized on a regular basis. For example the library information system that saves two minutes in providing information about a particular book whether it is issued or not, to the borrower compared with the manual system. The amount of time saved varies with the information given to the number of borrowers.
Cost Benefit Analysis : We define cost benefit analysis as -
a) The method by which we find and estimate the value of gross benefits of a new system specification
b) The method by which we find and determine the increased costs associated with the above mentioned gross benefits.
c) The subtraction of these operating costs and associated gross benefits to arrive at total benefits.
d) Those methods by which we find and estimate the monetary values of the development costs that produce the above mentioned benefits.
e) Those methods by which we show the time-phased relationship between new benefits and development costs as they are related to each cash flow, payback