System analysis and design chapter 4. 1 ) I have been asked by my boss to do an

Question

System analysis and design chapter 4.

1 ) I have been asked by my boss to do an economic cost-benefit analysis techniques. Why does the time value of money matter? Please explain this to me in common terms.

2) Please come up a business example that will explain the three primary project identification and selection phase activities. For each activity give AT LEAST ONE real example based on your own business example. You must make up your business example. Set the stage and explain your example.

3) Six major categories of feasibility are discussed in the text. What is meant by the "stakeholders" in relationship to political feasibility, and how does this relate to assessing project feasibility? What could this mean to you, assuming you are a junior person on a project team?

Explanation / Answer

1)

Short Explaination :

Cost-benefit analysis (CBA) is a technique used to compare the total costs of a programme/project with its benefits, using a common metric (most commonly monetary units). This enables the calculation of the net cost or benefit associated with the programme.

As a technique, it is used most often at the start of a programme or project when different options or courses of action are being appraised and compared, as an option for choosing the best approach. It can also be used, however, to evaluate the overall impact of a programme in quantifiable and monetised terms.

CBA adds up the total costs of a programme or activity and compares it against its total benefits. The technique assumes that a monetary value can be placed on all the costs and benefits of a programme, including tangible and intangible returns to other people and organisations in addition to those immediately impacted. As such, a major advantage of cost-benefit analysis lies in forcing people to explicitly and systematically consider the various factors which should influence strategic choice.

Decisions are made through CBA by comparing the net present value (NPV) of the programme or project’s costs with the net present value of its benefits. Decisions are based on whether there is a net benefit or cost to the approach, i.e. total benefits less total costs. Costs and benefits that occur in the future have less weight attached to them in a cost-benefit analysis. To account for this, it is necessary to ‘discount’ or reduce the value of future costs or benefits to place them on a par with costs and benefits incurred today. The ‘discount rate’ will vary depending on the sector or industry, but public sector activity generally uses a discount rate of 5-6%. The sum of the discounted benefits of an option minus the sum of the discounted costs, all discounted to the same base date, is the ‘net present value’ of the option.

Example

In 2005 the UK Government undertook a value for money analysis of Government investment in different types of childcare. The choice was between higher cost "integrated" childcare centres, providing a range of services to both children and parents, or lower cost "non-integrated" centres that provided basic childcare facilities.

The analysis included both a 'hard exercise' and a 'soft exercise'. The hard exercise identified, quantified and monetised direct costs and benefits. The soft exercise identified and described qualitatively non-monetisable impacts, leading to option ranking.

There are several economic evaluation methods available to assess an investment. The most widely used methods are Net Present Value (NPV) and Discounted Cash Flow Rate of Return, or Internal Rate of Return (IRR). Even though, NPV approach and IRR approach will normally provide the same decision result, polls of industry indicate that the IRR is the number one economic evaluation decision method use by about two-thirds of industrial companies (Chen 1996). This is due to the fact that some managers prefer a percentage rate of return more than the dollar amount from NPV.

Before calculating NPV and IRR, one should have an understanding of basic finance concept called “Time value of money”. The concept of Time value of money is that a dollar today is worth more than a dollar available at a future date because a dollar today can be invested and earn a return. Someone investing a sum of money today at a given interest rate for a given period of time would expect to have larger sum of money at the future date (Baker and Powell 2005). As different projects may provide benefits at the different time in the future, all costs and benefits of the projects should be viewed in relation to their present value.

Time Value of Money :
Present value is the value of a future cash stream discounted at the appropriate market interest rate, called discount rate. The present value of the future cash flow can be calculated using the following equation:

PV=FV/(1+r)n
PV= Present value
FV= Future value of the amount n periods from now
r= discounted rate
n= year the amount occured

Verdict :

By reducing the positive and negative impacts of a project to their equivalent money value Cost-Benefit Analysis determines whether on balance the project is worthwhile. The equivalent money value are based upon information derived from consumer and producer market choices; i.e., the demand and supply schedules for the goods and services affected by the project. Care must be taken to properly allow for such things as inflation. When all this has been considered a worthwhile project is one for which the discounted value of the benefits exceeds the discounted value of the costs; i.e., the net benefits are positive. This is equivalent to the benefit/cost ratio being greater than one and the internal rate of return being greater than the cost of capital.
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3)

Political feasibility analysis is used to predict the probable outcome of a proposed solution to a policy problem through examining the actors, events and environment involved in all stages of the policy-making process. It is one frequently used component of a policy analysis and can serve as an evaluative criterion in choosing between policy alternatives.Feasible policies must be politically acceptable or at least not unacceptable. Political unacceptability is a combination of two conditions too much opposition or too little support. One common mistake is widespread in practice that feasibility becomes a dominant criterion of preferable alternative.

Feasibility is “the state or degree of being easily or conveniently done”. More plainly, one might ask “can we get this done?” Feasibility, as it pertains to the political arena, speaks to the political climate. The question then becomes: “In this political climate, can we get this done?”

Political feasibility is a measure of how well a solution to a policy problem, will be accepted by a set of decision makers and the general public. For a policy to be enacted and implemented, it must be politically acceptable, or feasible. A policy alternative's lack of political feasibility can often be attributed to its lack of political support or the result of controversy that may surround the issue the policy seeks to address.Alternatively, a politically feasible alternative is one that has the greatest probability of "receiv[ing] sufficient political push and support to be implemented" given any specific constraints.

When policy analysis generates policy alternatives, the political risks and costs associated with each can be important criteria for deciding between alternatives. A good policy alternative requires a certain amount of political feasibility, or implementation of the policy will be impossible. It is important to keep in mind, however, that feasibility alone does not make a policy "good." Examining all criteria is necessary for the implementation of socially responsible policy.

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The Feasibility Study – Key Factors

Projects come and projects go. Some succeed and some fail. Some result in lucrative windfalls for the organization. Others languish in purgatory for years or decades producing little to no value add over the long-term.
Regardless of outcome, whenever a new project is being considered, the invariable question that comes up is whether or not the project is actually feasible? What steps should the project manager (along with other key stakeholders take) when evaluating a new project to determine whether or not they can (or should) move ahead with it?
There are several key questions that should be addressed by the project manager, the sponsor and the stakeholders when examining whether or not to proceed with a project. Some of those key factors are:

Business Alignment
Whenever envisioning something new, a primary question to ponder is: does this project (and its ensuing deliverable) correspond with the broader mission statement of the company? It’s an important question to ponder since attempting something ‘new’ or ‘radical’ can sometimes lead to great success or dismal failure. What is imperative is that when assessing the viability of a project, it is important to ensure that it aligns well with the business initiatives. If, for example, your company is moving to a very focussed .cloud route, projects that fall into that scope should be given precedence. Conversely, if your company is strictly software focussed but the project calls for hardware design and implementation, than that needs to be scrutinized. Whatever the scenario, it is important to ensure that the project is in the best interests of the company moving forward and that it’s implementation has some tangible benefits down the road.

Technology and System Assessment
Once initially scoped and brainstormed, it is important for the project manager to determine the technology viability of the proposed project and its deliverables. In many cases, the individuals brainstorming a new idea or concept may not have the requisite technical know-how to be able to gauge whether the resultant solution is possible, given the technology of the time or the capabilities of the company. So when scrutinizing the proposed project, the team and stakeholders need to ensure they have several more senior technical consultants provide input. There may be situations where the project can proceed but requires a partnership with an external vendor. Additionally, certain contractors with specific skills may be needed and their inherent cost needs to be considered. In any sense, having a firm grasp on what can be done is important and this needs to be well-known up front. Otherwise, the project could end up dying half way through its implementation because a key technology constraint was not considered.
Economic Viability

When looking at how to proceed with a project, it’s necessary to look at the full impact of the project from an economic standpoint. That entails determining the estimated costs of implementation, the projected return on investment and the market niche being targeted and saturated it is. If the project is looking to produce a deliverable that has some intrinsic function that the company wants to be part of its broader portfolio, that is something that needs to be considered. Cost/benefit analysis as well as SWOT and market analysis performed by Product Managers can provide a good assessment of the economic viability of a project and should be part of the overall feasibility study.

Operational Considerations
When looking at the project, what has been scoped and the inherent requirements listed, it is important to ask: does the proposed solution adequately solve the problem or fill the niche in the manner expected? In certain cases, a proposed project under consideration sometimes provides a solution that is tangential to the expectations of the end market and as such, is not fully viable in its current form. By reviewing the operational considerations thoroughly, one can make a more informed decision as to whether the existing deliverable is the end result every wants or does it need to be redesigned or re-scoped.

Legal Ramifications
Whenever a project is under consideration and has certain features scoped, it is important to determine if there are any legal issues with the current implementation. Some of those areas of concern might be government regulations (foreign and domestic), patent infringement issues, company compliance measures, and so forth. Understanding what (if any) legal considerations need to be addressed is important to ensure that the project does not run into unexpected roadblocks in its implementation.

Schedule and Resource Concerns
Arguably one of the most important considerations for the feasibility study, how the project affects the timeline of other release trains and how adequately it can be staffed is of vital importance. Whenever scoping a project, the number of resources and initial schedule estimates should be referenced against existing projects. What impact, if any, will implementing the current project have on other projects? Will schedules slip or have to be pushed out if it is enacted? And will the necessary resources be available for full implementation of the project? All are important considerations to ponder whenever performing this portion of the feasibility assessment.

Market Dynamics
Whenever looking to implement a new project that involves some type of to-market deliverable, it is important to look at market trends to gauge how viable the product will be. Are there other solutions out there that already have a head start? Does the current solution provide something ‘new’ or ‘unique’ in relation to its competitors? Is the current implementation up to modern standards or is it based on technology or concepts that have become stale? All of these need to be considered in the feasibility study.

Company Cultural & Political Concerns
Finally, when looking at the project, a consideration is to also look at the company and its overall culture and functional directive. If the project is a process methodology change or some fundamental shift in the internal way things are performed internally, that has to be approached cautiously. Whether it be adopting an Agile process, implementing a new Change Management System, or performing a portfolio shift, the sentiment of the company and its current culture need to be taken into account.
In closing, it is always important to determine up front whether or not it makes sense to move ahead with a given project. Projects that are taken on full tilt without up front feasibility discussions could end up wasting copious time, money and resources that would have been better suited in other areas. This can lead to missed revenue estimates for the company or sub-standard deliverables.

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