Chapter 4
Feasibility Analysis
McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Feasibility Analysis
Feasibility – the measure of how beneficial or
practical an information system will be to an
organization.
Feasibility analysis – the process by which
feasibility is measured.
Creeping Commitment – an approach to
feasibility that proposes that feasibility should be
measured throughout the life cycle.
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Feasibility Checkpoints
• Systems Analysis — Scope Definition
• Systems Analysis — Problem Analysis
• Systems Design — Decision Analysis
4-3
Four Tests For Feasibility
Operational feasibility – a measure of how well a solution
will work or be accepted in an organization.
Usability analysis – a test of the system’s user
interfaces.
Technical feasibility – a measure of the practicality of a
technical solution and the availability of technical
resources and expertise.
Schedule feasibility – a measure of how reasonable the
project timetable is.
Economic feasibility - a measure of the cost-
effectiveness of a project or solution.
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Cost-Benefit Analysis
Techniques
Costs:
• Development costs are one time costs that will not recur after
the project has been completed.
• Operating costs are costs that tend to recur throughout the
lifetime of the system. Such costs can be classified as:
• Fixed costs — occur at regular intervals but at relatively
fixed rates.
• Variable costs — occur in proportion to some usage
factor.
Benefits:
• Tangible benefits are those that can be easily quantified.
• Intangible benefits are those benefits believed to be difficult
4-5 or impossible to quantify.
Costs for a Proposed Systems
Solution
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Three Popular Techniques to
Assess Economic Feasibility
• Net Present Value
• Payback Analysis
• Return On Investment
The Time Value of Money is a concept that
should be applied to each technique. The time
value of money recognizes that a dollar today is
worth more than a dollar one year from now.
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Net Present Value (NPV)
Analysis
Net Present Value (NPV) – an analysis
technique that compares the annual
discounted costs and benefits of alternative
solutions.
4-8
Present Value Formula
Present Value – the current value of a
dollar at any time in the future.
Discount rate (factor) – a percentage similar to
interest rates that you earn on your savings.
In most cases the discount rate for a business is the
opportunity cost of being able to invest money in other projects
or investments
4-9
Cost and Benefits Formulas
4-10
Example
4-11
Payback Analysis
Payback analysis – a technique for
determining if and when an investment will
pay for itself.
Payback period – the period of time that
will lapse before accrued benefits overtake
accrued and continuing costs.
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Payback Analysis for a Project
4-13
Return-on-Investment Analysis
(ROI)
Return-on-Investment (ROA) analysis – a technique that
compares the lifetime profitability of alternative solutions.
The ROI for a solution or project is a percentage rate that
measures the relationship between the amount the
business gets back from an investment and the amount
invested.
Lifetime ROI = (estimated lifetime benefits –
estimated lifetime costs) / estimated lifetime costs
Annual ROI = lifetime ROI / lifetime of the system
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