Comparison

Comparison

IT ECONOMICS CORPORATION ECONOMIC ANALYSIS OF PROPOSED ALTERNATIVE SOLUTION PROJECTS
Getting Started:
1. Make the entries called for below to identify your organization and the date of this Economic Analysis. For each
alternative solution, enter its descriptive name, the executive sponsor’s name (which is your name), and
a brief description of the benefits.
2. The chart and tables below are summaries of the results of an Economic Analysis comparing the
two hypothetical proposed alternative solutions. The data for these were entered into the two worksheets,
Alt.Sol.#1 and Alt.Sol.#2 (see tabs at bottom of screen). When you replace the data in these two worksheets
with your own data, the chart and tables below will show a financial comparison of your two proposed
alternative solutions.
3. After you make the entries on this page, do the following: (1) Examine the Alt.Sol.#1 and Al.tSol.#2
worksheets; (2) read the UseGuide and study the DataExample (which describes how the data for entry
into the AltSol#1 worksheet example were generated); (3) then enter your data into the Alt.Sol.#1 and
Alt.Sol.#2 worksheets. When you complete your work, your instructor may request that you submit this
entire workbook file rather than printouts of your work.
[Printout area starts here for this page.]
ECONOMIC ANALYSIS OF PROPOSED ALTERNATIVE SOLUTION PROJECTS
Name of Organization and Component: <for example, XYX Corp., Marketing Division>
Date of Economic Analysis: <enter date>
Alternative Sol. 1 Descriptive Name: <for example, Hire contractor to select and implement graphics management system (the AltSol#1 example)>
Executive Sponsor: <enter sponsor’s name or your name>
Brief Description of Benefits: <enter brief description>
Alternative Sol. 2 Descriptive Name: <for example, Use a graphics management system from a software-as-a-service host (the AltSol#2 example)>
Executive Sponsor: <enter sponsor’s name or your name>
Brief Description of Benefits: <enter brief description>
Financial Comparison of Alternative Solutions (Constant Dollars)
Summary of Comparison Results
Payback System Discount
ROI NPV in Years Life (Yrs) Rate
Alt. Solution #1: 170% $364,536 2 5.5 0.05
Alt. Solution #2: 287% $523,502 1 5.5 0.05
All costs and benefits are estimated from the baseline. Because of this,
the baseline is represented by zero dollars in the chart. The baseline is
made up of the costs and benefits that exist before the project to implement
the proposed solution begins. If the project will add a net cost in a year, it
appears as a negative (below the baseline) in the chart. If the project will add
a net benefit, it appears as a positive (above the baseline) in the chart. The
tables above and below and the chart to the left show the life cycle results
from the two projects.
Net Financial Gain or Loss by Year in Constant Dollars
CurYr CurYr+1 CurYr+2 CurYr+3 CurYr+4 CurYr+5 CurYr+6 CurYr+7
AltSol#1 -$149,600 $83,429 $110,884 $109,405 $107,815 $102,603 $0 $0
AltSol#2 -$78,450 $87,714 $114,964 $131,433 $141,576 $126,265 $0 $0
Baseline $0 $0 $0 $0 $0 $0 $0 $0
Note: All financial comparison data on this page are in “constant dollars,” which means the
dollar figures are adjusted in terms of the value of today’s dollar.
Copyright © 2005-2010 IT Economics Corporation. All rights reserved.
This material is copyrighted and may not be copied or distributed without written permission from IT Economics Corporation. Certain colleges and universities have permission
to use the material in specific courses, which permission may be withdrawn at the discretion of IT Economics Corporation. Students enrolled in such a course may use the material
only in connection with meeting course requirements as specified by the course instructor and may not use or distribute the material for any other purpose.

Comparison

AltSol#1
AltSol#2
Baseline

AltSol#1

Alt Sol 2 System Life Calculation
Alternative Solution 1 – Return on Investment and Net Present Value Analyses 0.5
Please click on UseGuide and DataExample tabs (bottom of page) and read both before starting. 1
The UseGuide provides helpful comments and the DataExample illustrates how the data for this worksheet example were generated. 1
Note: Enter Project Name and then Current Dollars data only in the Step 2 yellow spaces. All other cells are locked. All calculations are automatic. 1
Copyright © 2005-2010 IT Economics Corporation http://www.iteconcorp.com 1
Step 1. Enter Project Name: Alt. Sol. #1 – Hire Contractor to Recommend and Implement an Off-the-Shelf Graphics Toolset 1
Step 2. In Current Dollars, enter: estimated dollar costs by year from the baseline to (1) conduct the project and (2) conduct operations for the system implemented system or being implemented. Then (3) estimate the dollar benefits by year from the baseline (total cost savings, total dollar value of the productivity improvements, and total cost avoidance savings). Finally, (4) indicate the probability that the projected benefits will be achieved. (An 80% probability that a $1000 benefit will be achieved will be automatically calculated at 80% of $1000, or $800.) Enter probabilities by category (savings, productivity improvements, and cost avoidances) and by year. Use an appropriate life cycle period, but not more than 7 years. Calendar Year 0
Current Dollars Current Year Current Year+1 Current Year+2 Current Year+3 Current Year+4 Current Year+5 Current Year+6 Current Year+7 Total 0
Estimated $ Investment Costs 5.5
Conduct Project
– Project Staff (with overhead) 168,000 0 0 0 0 0 0 0 168,000
– Software purchases 6,000 0 0 0 0 0 0 0 6,000
– Hardware purchases 0 0 0 0 0 0 0 0 0
– Training 10,000 0 0 0 0 0 10,000 Calculation of Payback Years
– Communications 1,800 0 0 0 0 0 0 0 1,800 2
– Facilities 0 0 0 0 0 0 0 0 0
– Travel 4,700 0 0 0 0 0 0 0 4,700
– Legacy phase out costs 0 0 0 0 0 0 0 0 0
– Other project costs 12,300 0 0 0 0 0 0 0 12,300
Total project cost 202,800 0 0 0 0 0 0 0 202,800
Cost of Operations From Baseline
– Operations staff (with overhead) 0 0 0 0 0 0 0 0 0
– Maintenance fees and licenses 1,200 1,250 1,300 1,350 1,400 1,450 0 0 7,950
– Security and privacy 0 0 0 0 0 0 0 0 0
– Other operations costs 0 1,000 1,050 1,100 1,150 1,200 0 0 5,500
Total operations cost 1,200 2,250 2,350 2,450 2,550 2,650 0 0 13,450
Total Estimated Dollar Cost 204,000 2,250 2,350 2,450 2,550 2,650 0 0 216,250
Estimated Benefits From Baseline
– Productivity Improvements1 68,000 102,000 136,000 136,000 136,000 136,000 0 0 714,000
– Quality improvements2 0 3,500 10,000 15,000 20,000 20,000 0 0 68,500
– Other increases in revenues3 0 0 0 0 0 0 0 0 0
– Cost avoidances & reductions4 0 0 0 0 0 0 0 0 0
Risk (Probability of Achieving):
– Productivity Improvements 80% 85% 85% 85% 85% 85% 0% 0%
– Quality improvements 0% 90% 90% 90% 90% 90% 0% 0%
– Other increases in revenues 0% 0% 0% 0% 0% 0% 0% 0%
– Cost avoidances & reductions 0% 0% 0% 0% 0% 0% 0% 0%
TOTAL RISK-ADJUSTED BENEFITS 54,400 89,850 124,600 129,100 133,600 133,600 0 0 665,150
Step 3. You need to take no action in this step. It is informational (see note at right). It assumes that the current year is also the base year (the start of the project). The base year is used as the starting year in the conversion to the constant dollars showing in Step 4. The discount rate is used to calculate constant dollars–that is, dollars that reflect the time value of money for the specific organization. Current Year Base Year Discount Rate Note: Normally, you would enter the current year, base year, and discount rate. They are provided here for the sake of simplicity.
[Actual Current Year would be entered] [Actual Base Year would be entered] 0.05
Calendar Year
Step 4. Conversion to Constant Dollars. You need take no action in this step. The Constant Dollars and Totals are automatically calculated from the discount rate identified above in Step 3. Each organization has its own discount rate, which a person must use when making constant dollar (present value) calculations. The federal government uses a discount rate established by the Office of Management and Budget. Constant Dollars Current Year Current Year+1 Current Year+2 Current Year+3 Current Year+4 Current Year+5 Current Year+6 Current Year+7 Total
Estimated Risk-Adjusted Costs
Investment Cost
– Conduct Project 202,800 0 0 0 0 0 0 0 202,800
– Conduct Operations 1,200 2,143 2,132 2,116 2,098 2,076 0 0 11,765
Total Investment Cost 204,000 2,143 2,132 2,116 2,098 2,076 0 0 214,565
Estimated Risk-Adjusted Benefits
– Productivity Improvements 54,400 82,571 104,853 99,860 95,104 90,576 0 0 527,364
– Quality improvements 0 3,000 8,163 11,662 14,809 14,103 0 0 51,737
– Other increases in revenues 0 0 0 0 0 0 0 0 0
– Cost avoidances & reductions 0 0 0 0 0 0 0 0 0
Total Risk Adjusted Benefits 54,400 85,571 113,016 111,521 109,913 104,679 0 0 579,101
Current Year Current Year+1 Current Year+2 Current Year+3 Current Year+4 Current Year+5 Current Year+6 Current Year+7 Total
Net Gain or Loss in Constant Dollars -$149,600 $83,429 $110,884 $109,405 $107,815 $102,603 $0 $0 $364,536
Payback Period (“No” means not yet paid back) No No Paid Back Paid Back Paid Back Paid Back Paid Back Paid Back Paid Back
ROI by Year: (PV Benefits-PV Costs)/PV Costs -73% 3893% 5202% 5169% 5139% 4942% 0% 0% 170%
Net Present Value: PV Total Benefits less PV Total Costs $364,536 <–This the value of the investment over its life cycle adjusted for the time value of money.
The numbers in this row are used as exponents in above PV calculations 0 1 2 3 4 5 6 7
1Productivity benefits result from either or both (a) reduced labor cost requirements per unit of output (e.g., new technology that requires less people to perform the same
amount of work; (b) cost savings from reduced need for non-labor resources per unit of output (e.g., new technology that reduces non-labor costs).
2Quality improvements may reduce costs and can increase sales; they usually mean fewer returns from customers, fewer repair costs, and less time spent with customers to
solve problems.
3Other increases in revenue can result from an IT-based improvement, such as making it possible, for example, to create new products, improve customer service, and
increase market share.
4Cost avoidance or reduction may be achieved, for example, by implementing a system that prevents losing a competitive edge, prevents loss through security breaches,
improves disaster protection, avoids the need to buy certain hardware and software, or avoids the need to purchase software licenses, among other possibilities.
Caution: Be careful not to double-count any cost or benefit. If the cost or benefit dollars are counted in one row,
they must not be included in any other row in the table.
Note: This is demonstration software. This software and associated documentation are provided “as is” without warranty of any kind. Moreover, IT Economics Corp. does not
make claims regarding the suitability or performance of this software for any specific purpose. The entire risk arising out of the use or performance of this software and
documentation remains with the person or organization that uses them. IT Economics Corporation shall not be liable for any damages whatsover arising out ot the use of
this software. By using this software, you agree to these provisions.
Copyright © 2001 – 2010 by IT Economics Corporation. All rights reserved.
Yr0 Yr1 Yr2 Yr3 Yr4 Yr5
Alt 1 $0 $0 $0 $0 $0 $0
Alt 2 $0 $0 $0 $0 $0 $0
Baseline 0 $0 $0 $0 $0 $0

AltSol#2

Alternative Solution 2: Return on Investment and Net Present Value Analyses
Please click on UseGuide and DataExample tabs (bottom of page) and read both before starting. Alt Sol 2 System Life Calculation
The UseGuide provides helpful comments and the DataExample illustrates how the data for the AltSol#1 worksheet example were generated. 0.5
Note: Enter Current Dollars data only in the Step 2 yellow spaces. All other cells are locked. All calculations are automatic. 1
Copyright © 2005-2010 IT Economics Corporation http://www.iteconcorp.com 1
Step 1. Enter Project Name: Implement a Graphics Mgmt System Hosted by a Software-as-a-Service (SaaS) Provider 1
Step 2. In Current Dollars, enter: estimated dollar costs by year from the baseline to (1) conduct the project and (2) conduct operations for the system implemented system or being implemented. Then (3) estimate the dollar benefits by year from the baseline (total cost savings, total dollar value of the productivity improvements, and total cost avoidance savings). Finally, (4) indicate the probability that the projected benefits will be achieved. (An 80% probability that a $1000 benefit will be achieved will be automatically calculated at 80% of $1000, or $800.) Enter probabilities by category (savings, productivity improvements, and cost avoidances) and by year. Use an appropriate life cycle period, but not more than 7 years. Calendar Year 1
Current Dollars Current Year Current Year+1 Current Year+2 Current Year+3 Current Year+4 Current Year+5 Current Year+6 Current Year+7 Total 1
Estimated $ Investment Costs 0
Conduct Project 0
– Project Staff (with overhead) 99,800 0 0 0 0 0 0 0 99,800 5.5
– Software purchases 0 0 0 0 0 0 0 0 0
– Hardware purchases 0 0 0 0 0 0 0 0 0
-Training 10,000 0 0 0 0 0 0 0 10,000 Calculation of PayBack Years
– Communications 1,800 0 0 0 0 0 0 0 1,800 1
– Facilities 0 0 0 0 0 0 0 0 0
– Travel 4,700 0 0 0 0 0 0 0 4,700
– Legacy phase out costs 0 0 0 0 0 0 0 0 0
– Other project costs 9,000 0 0 0 0 0 0 0 9,000
Total project cost 125,300 0 0 0 0 0 0 0 125,300
Cost of Operations From Baseline
– Operations staff (with overhead) 0 0 0 0 0 0 0 0 0
– Maintenance fees and licenses 0 0 0 0 0 0 0 0 0
– Security and privacy 0 0 0 0 0 0 0 0 0
– Other operations costs 5,000 12,000 12,000 12,000 12,000 12,000 0 0 65,000
Total operations cost 5,000 12,000 12,000 12,000 12,000 12,000 0 0 65,000
Total Estimated Dollar Cost 130,300 12,000 12,000 12,000 12,000 12,000 0 0 190,300
Estimated Benefits From Baseline
– Productivity Improvements1 68,000 102,000 136,000 136,000 136,000 136,000 0 0 714,000
– Quality improvements2 0 5,000 10,000 20,000 30,000 30,000 0 0 95,000
– Other increases in revenues3 0 0 0 0 0 0 0 0 0
– Cost avoidances & reductions4 5,000 20,000 20,000 25,000 25,000 25,000 0 0 120,000
Risk (Probablities of Achieving):
– Productivity Improvements 70% 80% 80% 90% 90% 90% 0% 0%
– Quality improvements 0% 90% 90% 90% 90% 90% 0% 0%
– Other increases in revenues 0% 0% 0% 0% 0% 0% 0% 0%
– Cost avoidances & reductions 85% 90% 95% 95% 95% 95% 0% 0%
TOTAL RISK-ADJUSTED BENEFITS 51,850 104,100 136,800 164,150 173,150 173,150 0 0 803,200
Step 3. You need to take no action in this step. It is informational (see note at right). It assumes that the current year is also the base year (the start of the project). The base year is used as the starting year in the conversion to the constant dollars showing in Step 4. The discount rate is used to calculate constant dollars–that is, dollars that reflect the time value of money for the specific organization. Current Year Base Year Discount Rate Note: Normally, you would enter the current year, base year, and discount rate. They are provided here for the sake of simplicity.
[Actual Current Year would be entered] [Actual Base Year would be entered] 0.05
Calendar Year
Step 4. Conversion to Constant Dollars. You need take no action in this step. The Constant Dollars and Totals are automatically calculated from the discount rate identified above in Step 3. Each organization has its own discount rate, which a person must use when making constant dollar (present value) calculations. The federal government uses a discount rate established by the Office of Management and Budget. Constant Dollars Current Year Current Year+1 Current Year+2 Current Year+3 Current Year+4 Current Year+5 Current Year+6 Current Year+7 Total
Estimated Risk-Adjusted Costs
Investment Cost
– Conduct Project 125,300 0 0 0 0 0 0 0 125,300
– Conduct Operations 5,000 11,429 10,884 10,366 9,872 9,402 0 0 56,954
Total Investment Cost 130,300 11,429 10,884 10,366 9,872 9,402 0 0 182,254
Estimated Risk-Adjusted Benefits
– Productivity Improvements 47,600 77,714 98,685 105,734 100,699 95,904 0 0 526,335
– Quality improvements 0 4,286 8,163 15,549 27,000 21,155 0 0 76,153
– Other increases in revenues 0 0 0 0 0 0 0 0 0
– Cost avoidances & reductions 4,250 17,143 19,000 20,516 23,750 18,609 0 0 103,268
Total Risk Adjusted Benefits 51,850 99,143 125,848 141,799 151,449 135,668 0 0 705,756
Current Year Current Year+1 Current Year+2 Current Year+3 Current Year+4 Current Year+5 Current Year+6 Current Year+7 Total
Net Gain or Loss in Constant Dollars -$78,450 $87,714 $114,964 $131,433 $141,576 $126,265 $0 $0 $523,502
Payback Period (“No” means not yet paid back) No Paid Back Paid Back Paid Back Paid Back Paid Back Paid Back Paid Back Paid Back
ROI by Year: (PV Benefits-PV Costs)/PV Costs -60% 768% 1056% 1268% 1434% 1343% 0% 0% 287%
Net Present Value: PV Total Benefits less PV Total Costs $523,502 <–This the value of the investment over its life cycle adjusted for the time value of money.
The numbers in this row are used as exponents in above PV calculations 0 1 2 3 4 5 6 7
1Productivity benefits result from either or both (a) reduced labor cost requirements per unit of output (e.g., new technology that requires less people to perform the same
amount of work; (b) cost savings from reduced need for non-labor resources per unit of output (e.g., new technology that reduces non-labor costs).
2Quality improvements may reduce costs and can increase sales; they usually mean fewer returns, fewer repair costs, and less time spent with customers to solve problems.
3Other increases in revenue can result from an IT-based improvement making it possible, for example, to create new products, improve customer service, and
increase market share.
4Cost avoidance or reduction may be achieved, for example, by implementing a system that prevents losing a competitive edge, prevents loss through security breaches,
improves disaster protection, avoids the need to buy certain hardware and software, or avoids the need to purchase software licenses, among other possibilities.
Caution: Be careful not to double-count any cost or benefit. If the cost or benefit dollars are counted in one row,
they must not be included in any other row in the table.
Note: This is demonstration software. This software and associated documentation are provided “as is” without warranty of any kind. Moreover, IT Economics Corp. does not
make claims regarding the suitability or performance of this software for any specific purpose. The entire risk arising out of the use or performance of this software and
documentation remains with the person or organization that uses them. IT Economics Corporation shall not be liable for any damages whatsover arising out ot the use of
this software. By using this software, you agree to these provisions.
Copyright © 2001 – 2010 by IT Economics Corporation. All rights reserved.

UseGuide

After reading this page, be sure to see the Data Example on the next Worksheet
PLEASE DO NOT CHANGE SPREADSHEET SETTINGS
There are many tools available to unlock spreadsheets, but there is no need to unlock the spreadsheet to use it. Those who unlocked the spreadsheet in the past usually did so to change it in some way, which invalidates the spreadsheet results. In college courses, a modified spreadsheet is not acceptable to the instructor and the student will be required to resubmit his or her work using the template spreadsheet in its original form.
SAMPLE ENTRIES IN THE TWO WORKSHEETS
The data now showing in the the AltSol#1 and AltSol#2 worksheets are sample data. The DataExample worksheet (see tab below) shows how the data in the AltSol#1 worksheet were generated. After you have studied the DataExample sheet in relation to the entries in AltSol#1, you should delete the AltSol#1 sheet entries before you begin to enter your own data. A simple way to do this is to type a zero (0) for each entry.
Data Provided For You
The Economic Analysis worksheets are designed to accommodate the types of projects a student is likely to propose in his or her class, while minimizing the burden to the student of using the economic analysis worksheets. The objective is to provide the student with an opportunity to perform an economic analysis on the student’s two best alternative solutions without requiring the student to supply detailed data that might not be readily available. Items of data are provided in the spreadsheet that the student otherwise would have to provide when using an economic analysis tool. They are:
1. A discount rate of 5% is a “provided entry” in the spreadsheet. This rate might be high for government agencies, but it is very low for most commercial organizations. A discount rate is required to compute Net Present Value. Generally speaking, a discount rate takes into account opportunity cost and the cost of capital (e.g., the interest rate that must be paid for the funds). The federal Office of Management and Budget sets the discount rate annually for federal agencies. Commercial firms set their own discount rates. You can obtain more information on these financial terms through Internet searches.
2. The spreadsheet uses the Current Year for both the “Current Year” and the “Base Year.” In other words, this spreadsheet cannot accommodate a project that started before the Current Year.
Entering Benefit and Cost Data
When you enter cost and benefit data for your proposed projects, keep in mind that these need to be “changes from the baseline”– that is, changes from the present levels of benefits and costs.
For example, if the current process generates revenues of $50,000 per year and your proposed project would change the system so it would generate revenues of $60,000 per year, then the benefit in terms of revenue generation is $10,000 per year. You enter $10,000 for that year in the worksheet.
Don’t count a cost or a benefit twice. For example, if the present Cost of Operations is $50,000 per year and the Cost of Operations under your proposed project will be $40,000 per year starting in, say, year 2 of your project, then the entry for Cost of Operations starting in year 2 is -$10,000. Note that this entry is made in the cost section, but it shows a savings. Do not also enter this $10,000 savings in the benefits section starting in year 2.
Never enter a cost or a benefit that you cannot defend or that is not independently verifiable. Since you are estimating a future cost or benefit, you will need to rely on reasonable and acceptable assumptions. Document your key assumptions and verify with stakeholders and others that they are reasonable and that no unstated or unrecognized assumption is being made. (If you are using the worksheets as part of a college course, documenting assumptions is for your own purposes–do not submit documented assumptions to your instructor unless requested.)
Dollar Amounts and Cell Considerations
This is demonstration software so the cells are not as large as they otherwise would be. The size of the cells in the spreadsheet means that using large numbers could cause ##### to appear in a cell because the entered or calculated number is too large for the cell. If you are using the worksheets as part of a college course, this is unlikely to happen with your project, especially if you follow the instructor’s advice to keep the size of your project at a “doable” level. If it does occur with your project, try to modify the amounts entered to reduce their size. For example, you could enter your numbers in thousands, so 20,000 would be entered as 20. In using the results of the worksheet calculations, simply multiply the results by 1000.
One Last Point
This is a reduced-size, customized version of a more complex spreadsheet. In accomplishing the reduction, we don’t think we introduced any errors. However, if you do find an error, please let us know and we will correct it as soon as possible. Best of luck with your economic analyses of projects.
Copyright © 2010 by IT Economics Corporation. All rights reserved.

DataExample

HOW DATA WERE GENERATED TO COMPLETE THE ALT.SOL. #1 WORKSHEET
Note: Students usually do not need to prepare and submit this type of breakdown of cost information. Rather,
they are usually asked to prepare and submit a work breakdown structure, which shows costs by project phase.
Determining Project Costs
A work breakdown structure and identification of benefits and costs are necessary to obtain data for the Worksheet.
The information below comes from a work breakdown structure and related cost-benefit analyses.
Project Title: Alt.Sol. #1 -Hire contractor to recommend and implement an off-the-shelf graphics toolset.
Length of Project: The project will be completed in six months and become operational within the Current Year.
Phases and Tasks: The phases and tasks in this project as well as the costs by phase are as follows:
Note: These are only contractor hours, costs, and fees, which are paid for by the buyer. Although buyer staff are
members of the integrated project team (IPT), their hours and costs are not shown here. They are covered in a
different budget. Labor hour costs include the related overhead costs.
Phases and Tasks Details of Non-Labor Costs By Phase
Phase 1 Confirm Requirements (2 weeks) Labor Hours* – Software purchases
Task 1 Orient IPT members and users 60 – Hardware purchases
Task 2 Confirm Tool Requirements 100 – Communications $300
– Facilities
Labor cost @ ave. $150 per hour: $24,000 – Travel $200
Communications & Travel $500
Other project costs (Misc.) $300 – Legacy phase out costs
Phase Cost: $24,800 – Other project costs $300
Phase 2 Select Graphics Tool (2 Weeks) Labor Hours – Software purchases $6,000
Task 3 Conduct market research 60 – Hardware purchases
Task 4 Evaluate Tools 80 – Communications $300
Task 5 Make site visits 40 – Facilities
– Travel $4,000
Labor cost @ ave. $150 per hour: $27,000 – Legacy phase out costs
Est. cost of 3 graphics softw sys: $6,000 – Other project costs
Communications & Travel $4,300
Other costs (Misc.): $0
Phase cost: $37,300
Phase 3 Customize Tool (4 weeks) Labor Hours – Software purchases
Task 6 Design integration programs 60 – Hardware purchases
Task 7 Design mgmt and user reports 80 – Communications $600
Task 8 Program integration software 100 – Facilities
Task 9 Program mgmt and user reports 100 – Travel $300
– Legacy phase out costs
Labor cost @ ave. $150 per hour: $51,000 – Other project costs
Communications & Travel $900
Other costs (Misc.): $0
Phase cost: $51,900
Phase 4 Implement and Transition (8 Wks) Labor Hours – Software purchases
Task 10 Implement systems 160 – Hardware purchases
Task 11 Conduct system tests 160 – Communications $600
Task 12 Plan training program 50 – Facilities
Task 13 Assist in training program 50 – Travel $200
Task 14 Complete transition 20 – Legacy phase out costs
– Vendor custom training program $10,000
Labor cost @ ave. $150 per hour: $66,000 – Other project costs $1,000
Communications & Travel $800 – Incentive bonus $11,000
Vendor Training $10,000
Other costs (Misc): $1,000
Incentive bonus $11,000
Phase cost: $88,800
Total Cost of Phases: $202,800
Project Cost Summary: Current Year Post Project
Labor hours (Project Staff): $168,000 – License & Maintenance Fee $1,200
Contract training $10,000 (@ 20% of software price)
Communications & Travel $6,500 Subsequent Years: $1,200
Software purchase $6,000
Other project costs (except incentive bonus): $1,300
Incentive bonus $11,000
Other costs not included above:
Total Expected Current Year Project Cost $202,800
Penalty if poor performance $5,000
Other Costs
License and Maintenance fees to vendor $1,200
TOTAL CURRENT YEAR COST: $204,000
Worksheet AltSol#1 Cost Entries
Entries in the Conduct Project section of the Worksheet
Project staff $168,000
Software purchase $6,000
Communications $1,800
Travel $4,700
Training $10,000
Other $12,300 (Excludes CY Lic. & Maint. Fees)
Subtotal: $202,800
Entry in the Cost of Operations from Baseline Section
License&Maint. fees $1,200
Subtotal: $1,200
TOTAL: $204,000
(Note: Benefit entries are explained in below section titled Comments on Worksheet Entries)
Comments on Worksheet Cost Entries:
General Comments
Costs incurred before a project starts are usually budgeted separately and not included in the project costs.
Project costs usually begin when the project starts and end when project ends and the implemented system becomes operational.
License and maintenance fees for vendors may begin during the project’s Current Year and will continue into future years.
The benefits sometimes start during the project, though full benefits usually are not obtainable until after the end of the project.
Project Costs
The Phases and Task columns above show project labor costs and summary costs by phase. Details of the project’s non-labor
costs are shown in the Details of Non-Labor Costs columns above. Most of the costs are under the “Conduct Project” heading (see
worksheet Alt.Sol.#1). The largest single cost is for Project Staff (with overhead). This is followed by Incentive bonus, Training costs,
Software purchase cost, Communications costs, Travel costs, and Other project costs. The “Other project costs” include the Current
Year’s license and maintenance fees, which will be an annual cost after the project ends.
The next group of costs is Cost of Operations from the Baseline. The only entries here are for “Maintenance fee and licenses” and
“Other operations” costs. The “Maintence fees and licenses” are new costs that are not replacing current costs. The “Other operations
costs” are costs that exceed the current operations costs.
Determining Project Benefits
The worksheet provides for four categories of expected benefits, each of which is given a separate row in the worksheet. The economic value of
each benefit is estimated by year and then entered into the worksheet. The major benefit is a projected increase in the productivity of providing
graphics support for proposal preparation. It now costs $6,000 per month to produce graphics for 10 proposals. The new system will
enable 15 or more proposals per month to be supported for the same cost. This increase in graphics-support productivity is equal to $3,000 per
month or $36,000 annually. However, while increasing the productivity of graphics support is important, the principal reason for this IT investment
is to make it possible to increase revenues by generating more high-quality proposals.
Assuming the same hit rate for proposals, the new capability is expected to generate an additional $5 million per year in revenues. Although
many factors contribute to preparing winning proposals and getting the business, it is agreed among the departments that a part of this gain
needs to be attributed to the new graphics support capability. In discussions with the various departments, it is agreed that the enhanced
graphics support will account for about 2% of the gain in expected new revenues, or about $50,000 per year. Adding the $36,000 annual
productivity improvement to the $100,000 in increased revenues is an annual benefit of $136,000 when the system is fully operational. However,
during the “Current Year,” the total will be less because the new system will be operational only a small part of the year. The planners
agree to enter expected “Productivity Improvements” of $68,000 for the Current Year, rising to $136,000 by Current Year+2.
Another expected benefit is an improvement in the quality of the proposals, including fewer errors, less time and resources required for error
correction, better organization of the proposal, and a better physical appearance. This is expected to contribute to winning proposals. The
departments agree that, if the expected revenues materialize, the quality of the proposals due to the enhanced graphics capability will be a
contributing factor. The departments decide that between 2/10ths and 4/10ths of 1% of the increased revenues should be attributed to the
increased quality provided by the graphics support system. This is a benefit of about $10,000 to $20,000 per year. A conservative approach is
taken and only $3,500 is entered for the first year of operation, rising to $20,000 in the fourth year.
Avoiding Double-Counting Benefits
There is frequently the question of how much should an IT improvement claim for an improvement that is expected to increase revenue. In this
case, the increased revenue would be an expected $5 million or more per year. It is tempting for IT project sponsors to claim a good part of
these benefits for their proposed project.They must be very careful in claiming such benefits. In this case, the graphics system is only one of
many enablers of these benefits. The graphic systems will not be responsible for winning the proposals. This means that the sponsor must
negotiate with the line-of-business managers to determine the amount of these benefits that can be claimed by the graphics support project in
its economic analysis and other documents. The sponsor often needs to accept less than he or she believes is fair. Doing so will not put the
proposed investment in jeopardy because the project is an enabler of much larger benefits so it will be supported by other stakeholders.
The most prudent approach, of course, is to not claim benefits based on the results of winning proposals, which recognizes that the graphics
support system will have very little control over the success of proposals. However, the graphics support system is an enabler and will make it
possible to support 50% more proposal preparations and its success will be measured in terms of whether or not it accomplishes this support
objective. The likelihood of substantially increasing proposal-generated revenue is the strongest selling point for this proposal. Moreover,
this proposal directly supports a high priority corporate objective. Therefore, crediting the IT graphics support system with some part of the
increased revenue seems justified, provided it is an amount agreed to by the other departments. What must be avoided is double-counting,
which results when each department claims a percentage of the benefits that add up to more than 100% of the benefits.
Risk Adjustments
Risk is represented in the worksheet as the probability that a stated benefit will be achieved. The probability for achieving the productivity
improvements is judged to be initially 80%, increasing to 85%.as the system matures. For the quality improvements, a relatively high
90% probability is entered. Note that no benefits were claimed for cost savings or cost avoidance.
Management Review and Decision
The economic analyis of Alt.Sol.#1 and Alt.Sol.#2 indicate that Alt.Sol.#2 is the better solution, so it will likely be the one that is recommended
to senior management. The ROI and NPV figures for AltSol#2 may not be as attractive as the figures for some other proposals submitted by
others who are competing for the same project funds. However, senior management will give much weight to the fact that Alt.Sol.#2 (which has
the same objective as Alt.Sol.#1) is a strong enabler of a proposal-preparation process that can potentially produce millions of dollars in
additional revenue for a relatively small investment. The linkage to a high priority objective/key performance indicator will carry much weight.
Why No Entries in Certain Rows?
Notice that certain rows have no entries. There are two reasons for this. As mentioned above, two of the four cost rows under Cost of Operations
from the baseline have no entries. This doesn’t mean there will be no “operations staff” cost or “security and privacy” costs. Such costs will
occur but they are expected to be about the same as the current (baseline) costs, so there are no entries for them in the worksheet. The
second reason why a row may have no entries is that the category simply is not applicable. This is why there are no entries for Cost avoidance
in the row under Estimated benefits from the baseline. There are no cost avoidances because they are already presented in another row
of the spreadsheet (e.g., cost avoidance due to increased quality).

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