Business Case


Feasibility study or project justification is also called as business
case.
This document may contain:
1. Introduction and background to the proposal
2. The proposed Project
3. The market
4. Organizational and operational infrastructure
5. The benefits
 Continued

6. Outline implementation plan
7.Costs
8.The financial case
9.Risks
10. Management plan
 Project Portfolio Management

The concerns of project portfolio management include:
 Identifying which project proposals are worth
implementation.
 Assessing amount of risk of failure that a potential project
has.
 Deciding how to share limited resources.
 Being aware of dependencies between projects.
 
 Ensuring the projects do not duplicate work.
 Ensuring that necessary developments have not been
inadvertently been missed.
 PROJECT EVALUATION

 Project evaluation is normally carried out in step 0 of
stepwise

 Project evaluation is a step by step process of collecting,

recording and organizing information about

 Project results
 short - term outputs (immediate results of activities or
project deliverables)
 Long – term outputs (changes in behaviour , practice or
policy resulting from the result.
Technical assessment:

 Technical assessment of a proposed system consists
of evaluating whether the required functionality can
be achieved with current affordable technologies.

 Organizational policy is likely to limit the technical

solutions considered.

 The costs of the technology adopted must be taken

into account in the cost-benefit analysis.
Economic Assessment :
COST BENEFIT ANALYSIS

It is one of the important and common way of
carrying “economic assessment” of a proposed
information system.
This is done by comparing the expected costs of
development and operation of the system with its
benefits.
So it takes into account:
Expected cost of development of system
Expected cost of operation of system
Benefits obtained
Cost-benefit analysis comprises of two steps:
 Identifying all of the costs and benefits of carrying out the
project and operating the delivered application.

It includes:

 The development cost
 The operating costs
 The benefits expected from the new system.

 If the proposed system is a replacement, these estimates

should reflect the change in costs and benefits due to the
new system.
Example: A new sales order processing system, could only
claim to benefit an organization by the increase in sales due to
the use of the new system.
 Expressing these costs and benefits in common units.
Cost, benefit and net benefit should be expressed in terms of
money.


Net benefit = total benefit - total cost.
Three types of cost:

 Development costs: Includes salary and other employment
cost of staff involved.

 Setup costs: includes the cost of implementation of system

such as hardware, and also file conversion, recruitment and
staff training.

 Operational cost: cost require to operate system, after it is

installed.
Three categories of benefits:

Direct benefits: directly obtained benefit by making use of operating the
system.
Example: reduction of salary bills, through the introduction of a new
computerized system.

Assessable indirect benefits: these benefits are obtained due to updation /

upgrading the performance of current system. It is also referred as
“secondary benefits”.
Example: “use of user – friendly screen”, which promotes reduction in
errors, thus increases the benefit.
 
Intangible benefits: these benefits are longer term, difficult to
quantify. It is also referred as “indirect benefits”.

Example: enhanced job interest leads reduction of staff

turnover, in turn leads lower recruitment costs.
 Quantifying benefits
Benefits can be:

• Quantified and valued e.g. a reduction of x staff
saving £y

• Quantified but not valued e.g. a decrease in

customer complaints by x%

• Identified but not easily quantified – e.g. public

approval for a organization in the locality where
it is based.
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CASH FLOW FORCASTING:


It estimate overall cost and benefits of a product with respect
to time.

-ive cashflow during development stage.

+ive cashflow during operating life.

During development stage

 Staff wages
 Borrowing money from bank
 Paying interest to bank
 Payment of salaries
 Amount spent for installation, buying h/w and s/w
 
Income is expected by 2 ways.
 Payment on completion
 Stage payment
Accurate cash flow forecasting is difficult, as it is done early in
the project’s life cycle.
When estimating future cash flows, it is usual to ignore the
effects of inflation.
Forecasts of inflation rates tend to be uncertain.
Moreover, if expenditure is increased due to inflation it is likely
that income will increase proportionately.

 

Cost Benefit Evaluation techniques

 Cost Benefit Evaluation Techniques

It consider

 the timing of the costs and benefits
 the benefits relative to the size of the investment

Common method for comparing projects on the basis of their cash flow forecasting.

1) Net profit
2) Payback Period
3) Return on investment
4) Net present Value
5) Internal rate of return
 Net profit

The net profit of a project is the difference between
the total costs and the total income over the life of the
project.

Net profit=total costs-total incomes

 Calculate net profit.

Year Project1

Project2 Project3 Project4
0 -100000 -1,000,000 -100,000 -120,000
1 10,000 2,00000 30,000 30,000
2 10,000 2,00000 30,000 30,000

3 10,000 2,00000 30,000 30,000

4 20,000 2,00000 30,000 30,000

5 100000 3,00000 30,000 75,000

Net Profit
 The Net Profit.

Year Project1

Project2 Project3 Project4
0 -100000 -1,000,000 -100,000 -120,000
1 10,000 2,00000 30,000 30,000
2 10,000 2,00000 30,000 30,000

3 10,000 2,00000 30,000 30,000

4 20,000 2,00000 30,000 30,000

5 100000 3,00000 30,000 75,000

Net Profit 50,000 100,000 50,000 75,000

 The simple net profit takes no account of the timing of the
cash flows.
 Projects 1 and 3 each have a net profit of $50,000 and
therefore, according to this selection criterion, would be
equally preferable. 
 The bulk of the income occurs late in the life of project 1,
whereas project 3 returns a steady income throughout its
life.
 Having to wait for a return has the disadvantage that the
investment must be funded for longer.
 So, estimates in the more distant future are less reliable than
short-term estimates and we can see that the two projects are
not equally preferable.
 Payback Period

• The payback period is the time taken to break even or pay back the
initial investment.
Advantages
• Simple and easy to calculate.
• Not sensitive to small forecasting errors.

Disadvantages
• It ignores the overall profitability of the project, in fact, it totally ignores
any income once the project has broken even.
• Therefore, the fact that projects 2 and 4 are overall, profitable than
project 3 is ignored.
Calculate Payback Period
Year Project1

Project2 Project3 Project4
0 -100000 -1,000,000 -100,000 -120,000
1 10,000 2,00000 30,000 30,000
2 10,000 2,00000 30,000 30,000

3 10,000 2,00000 30,000 30,000

4 20,000 2,00000 30,000 30,000

5 100000 3,00000 30,000 75,000

Net Profit 50,000 100,000 50,000 75,000

 RETURN ON INVESTMENT or ACCOUNTING RATE OF
RETURN


• It provides a way of comparing the net profitability to
the investment required.

Disadvantages

• It takes no account of the timing of the cash flows.

• Rate of returns bears no relationship to the interest rates offered or
changed by bank.
RETURN ON INVESTMENT

ROI = average annual profit * 100
total investment

average annual profit = net profit

total no. of years
 
Calculate ROI for project 1.
Ans: Total investment =1,00,000
Net profit = 50,000
Total no. of year = 5

Average annual profit=50,000/5=10,000

ROI= (10,000/1,00,000) *100 = 10%
 Example1

Calculate the ROI for the following projects and comment,
which is the most worthwile.

 Investment Netprofit
 Project1 150000 50000
 Project2 1,000000 1,00000
 Project3 450000 40,000

The period of above project is 5 years.

 Example 2.

 There are two projects x and y. each project requires an investment of Rs
20,000. you are required to rank these projects according to the pay back
method from the following information.

 Year projectx projecty

 1 1000 2000
 2 2000 4000
 3 4000 6000
 4 5000 8000
5 8000
 Net present value (NPV)


• It is a project evaluation technique that takes into account the
profitability of a project and the timing of the cash flows that
are produced.
• It is better to receive 100$ today, than to wait until next year
to receive it.
Example:
if we invest $100 in a bank today and get 100$ + the interest in a year’s time.
If we say that the present value of $100 in a year’s time is $91, we mean that $100 in a
year’s time is equivalent of $91 now.
 
 The equivalence of $91 now and $100 in a year’s time means
we are discounting the future income by approximately 10%
 If we received $91 now and invested it for a year at an annual
interest rate of 10%, it would be worth $100 in a year’s time.
Discount Rate:
The annual rate by which we discount future earnings is known
as discount rate
 10% in the above example
 
Present value=Value in year t/ (1+r)t

Where r is the discount rate , expressed as a decimal

value, and t is the number of years into the future that
the cash flow occurs.
 Discount Factor


As the number of discounting periods between

now and the cash arrival increases, the present
value decreases.
As the discount rate (interest rate) in the present
value calculations increases, the present value
decreases.
 Net Present Value (NPV)

 The NPV for a project is obtained by discounting each cash
flow and summing the discounted values.
 Any initial investment take place immediately and is not
discounted.
 Later cash flows are normally assumed to take place at the
end of each year and are discounted by the approximate
amount.

 Applying discount factors
Year Cash-flow Discount Discounted cash
factor(discount flow
rate 10%) OR Present Value
0 -100,000 1.0000 -100,000
1 10,000 0.9091 9,091
2 10,000 0.8264 8,264
3 10,000 0.7513 7,513
4 20,000 0.6830 13,660
5 100,000 0.6209 62,090
NPV 618

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