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Chapter 13

Chapter 13. Topics: Systems proposal Determining hardware needs Determining software needs Decision to rent, lease, or buy Tangible and intangible costs and benefits Methods for selecting alternatives. Systems Proposal.

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Chapter 13

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  1. Chapter 13 Topics: • Systems proposal • Determining hardware needs • Determining software needs • Decision to rent, lease, or buy • Tangible and intangible costs and benefits • Methods for selecting alternatives

  2. Systems Proposal • In order to prepare the systems proposal analysts must use a systematic approach to identify hardware and software needs • Ascertaining hardware and software needs • Identifying and forecasting costs and benefits • Comparing costs and benefits • Choosing the most appropriate alternative

  3. Steps to Ascertain Hardware and Software Needs • Inventory computer hardware currently available • Estimate current and projected workload for the system • Evaluate the performance of hardware and software using some predetermined criteria • Choose the vendor according to the evaluation • Obtain hardware and software from the vendor

  4. Steps to Ascertain Hardware and Software Needs

  5. Hardware Inventory Check • Type of equipment: model no., manufacturer • Status of equipment operation • Estimated age of equipment • Physical location of equipment • Department or person responsible for equipment

  6. Criteria for Evaluating Hardware • Time required for average transactions (including time for input and output) • Total volume capacity of the system • Idle time of the central processing unit • Size of memory provided

  7. People that Evaluate Hardware • Management • Users • Systems analysts

  8. Three Options for Obtaining Computer Equipment • Buying • Leasing • Rental

  9. Buying

  10. Leasing

  11. Renting

  12. Evaluation of Vendor Support for Hardware • Hardware support • full line of hardware, quality products, warranty • Software support • complete software needs, custom programming, warranty • Installation and training support – commitment to schedule, in-house training, technical assistance • Maintenance support • routine maintenance procedures, specified response time in emergencies, equipment loan while repair is being done

  13. Guideline for Evaluating Software • Performance effectiveness – perform all required and desired tasks, well-designed display screens, adequate capacity • Performance efficiency – fast response time, efficient input, output, storage of data and backup • Ease of use – satisfactory user interface, help menu, ReadMe files, flexible interface, adequate feedback, good error recovery • Flexibility – options for input and output, usable with other software • Quality of documentation – good organization, adequate online tutorial, Web site with FAQ • Manufacturer support – tech support hot line, newsletter/email, downloadable product updates

  14. Costs and Benefits Analysis • Systems analysts should take tangible costs, intangible costs, tangible benefits, and intangible benefits into consideration to identify cost and benefits of a prospective system

  15. Tangible Costs • Tangible costs are those that can be accurately projected by systems analysts and the business' accounting personnel • Examples: • Cost of equipment • Cost of resources • Cost of systems analysts' time

  16. Intangible Costs • Intangible costs are those that are difficult to estimate, and may not be known • Examples: • Cost of losing a competitive edge • Declining company image

  17. Tangible Benefits • Tangible benefits are advantages measurable in dollars that accrue to the organization through use of the information system • Examples: • Increase in the speed of processing • Access to information on a more timely basis

  18. Intangible Benefits • Intangible benefits are advantages from use of the information system that are difficult to measure • Examples: • Improved effectiveness of decision-making processes • Maintaining a good business image

  19. Selecting the Best Alternative • To select the best alternative, analysts should compare costs and benefits of the prospective alternatives using • Break-even analysis • Payback • Cash-flow analysis • Present value method

  20. Break-Even Analysis • Break-even analysis is the point at which the cost of the current system and the proposed system intersect • Break-even analysis is useful when a business is growing and volume is a key variable in costs

  21. Break-Even Analysis

  22. Payback Period (PBP) • Payback determines the number of years of operation that the system needs to pay back the cost of investing in it • Payback is determined in one of two ways: • By increasing revenues • By increasing savings • If the PBP of a project is 6 years and the project can exist 3 years in the fast technology change situation—it should be rejected.

  23. How to determine PBP • PAY BACK PERIOD (PBP) Investment: $ 20,000 Amount Recovered in 2002: $ 7,312 Remaining Investment to be recovered: $12,668 Amount Recovered in 2003: $ 7,768 Remaining Investment to be recovered: $ 4,920 Part of 2004 Needed : 4,920/7352= 0.67 (Assuming that Amount Recovered in 2004 is $7352) PBP = 1 + 1 + 0.67 = 2.67 YEARS

  24. Payback Period

  25. Three Drawbacks of the Payback Method • It is strictly a short-term approach to investment and replacement decision • It does not consider the importance of how repayments are timed • It does not consider total returns from the proposed systems project that may go well beyond the payback year

  26. Cash-Flow Analysis • Cash-flow analysis is used to examine the direction, size, and pattern of cash flow associated with the proposed information system • Determines when a company will begin to make profit • Determine when cash outlays and revenues will made up for initial investment

  27. Cash-Flow Analysis

  28. Present Value Method • Assess all the economic outlays and revenues of the information system over its economic life and to compare costs today with future costs and today's benefits with future benefits • Use present value when the payback period is long, or when the cost of borrowing money is high

  29. Present Value Method Without considering present value Considering present value

  30. Guidelines for Selecting the Best Alternative • Use break-even analysis if the project needs to be justified in terms of cost, not benefits or if benefits do not substantially improve with the proposed system. • Use payback when the improved tangible benefits form a convincing argument for the proposed system. • Use cash-flow analysis when the project is expensive relative to the size of the company. • Use present value when the payback period is long.

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