Feasibility Study - Eng.ppt

7/28/2019 Feasibility Study - Eng.ppt

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Project Feasibility Study

Dr. A tt ia H. Gom aa

Head of Industrial Eng. Dept.Fayoum University

[email protected]

2006
mailto:[email protected]:[email protected]


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Cost

Features

Schedule

QualityStaff

Project Framework


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Pilot runand final tests

New product orservice launch

Final design& process plans

Ideageneration

Feasibilitystudy

Product orservice concept

Performancespecifications

Functionaldesign

Form design

Productiondesign

Revising and testingprototypes

Design

specifications

Manufacturing

or deliveryspecifications

SuppliersR&D

Customers

Marketing Competitors

Project Stages


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Project Stages


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1. Idea Generation - Product Concept2. Feasibility Study- Performance Specifications

3. Preliminary Design - Prototype

4. Final Design- Final Design Specifications

5. Process Planning- Manufacturing Specifications

6. Implementation

7. Operations & Maintenance

8. Project Closeout

Project Stages


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No

Ideageneration

Finaldesign

Preliminarydesign

Feasibilitystudy

Processplanning

Productfeasible?

Yes

Prototype

Manufacturing

Design & ManufacturingSpecifications

The Design Process


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Project Stages (General)

Project execution Design

Implementation

Validation

Conclusion

S0 S1 S3 S4 S5MS MS MS MS MS MS

S2MS MS

Support

Feasibility

studyPrestudy

Definition phase Execution phase


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Start End

Process defined Process ref ined

ImplementationFeasibility

Building consensus and consultation


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Main events

Prestudy Feasibility

Study

S0 S1 S3 S4 S5

MS MS MS MS MS MS MS

S2

Design Implementation

& Verification

Pilot &

ValidationConclusion

Idea is

defined

Main

requirements are

collected.

Project is planned

Resources are allocated

Cost-Benefit-Analysis is made

Product owner exists

Production

is planned

Ready for

piloting

Ready for

release

MS

Conclusion

Ready for

integration

Ready for

system testing


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Different views of requirements

Problem

Features

Needs

System requirements

Software requirements

Solution


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?

PROJECT

begin

ning

en

d

FEASIBILITYSTUDY

YesNo

Reconsider

WHAT IS A FEASIBILITY STUDY?

Feasib i l i ty study is a powerfu l systemat ic

methodology of the feasib i l i ty of a proposedproject , as a basis for decid ing whether i t should

proc eed or otherwise.


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The Feasibility Study

Brainstorming could be used to generatemany ideas for scenarios.

Pre-study:

Scope

Requirements

Targets

Constraints

Feasibility study


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Feasibility Study Factors

Major five factors: Social Technological

Environmental

Economic Political

Hard factors quantities and facts

Soft factors holistic representation

e.g. rich picture


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Feasibility Study

ProjectPlanning

TechnicalStudy

EnvironmentalStudy

Marketing

Study

EconomicalStudy


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Market study:-1

Customers types Customers needs Water quality Quantity rates

Water supply Price rates

2- Technical study: Engineering design

Equipment types International standards Cost estimation

Environmental study:-3

Environmental needs

4- Economical and financialstudy: Economic analysis Sensitivity Analysis Risk analysis

5- Project planning:

Project target plans Improvementsrecommendations

Feasibility study for water station project:


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Feasibility Study

1. Where to start ?

2. What to do ?

3. Who does what ?4. What are the results ?

5. Prototypes


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1. Where to start ?

Before FS Aft er FS


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2. What to do ?

Before FS Aft er FS


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3. Who does what ?

Before FS Aft er FS


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4. What are the results ?

Before FS Af ter FS


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5. Prototypes


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Idea Generation Sources

Companys own R&D

department

Customer complaints

or suggestions Marketing research

Suppliers

Salespersons in thefield

Factory workers

New technologicaldevelopments

Competitors


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Perceptual Maps Visual comparison of

customer perceptions

Benchmarking Comparing product/service

against best-in-class

Reverse engineering

Dismantling competitors product toimprove your own product

Idea Generation Sources (cont.)


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Feasibility studies: Technical feasibility - can we do it? Social feasibility - do we want it?

Economic feasibility - can we afford it? Operational feasibility - can we handle it?

Feasibility studies: are quantitative and qualitative

evaluate costs and benefits are retrospective (historical) and projective (futuristic)

Remember: state assumptions

use graphics visit sites and photograph


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TECHNICAL FEASIBILITY

Can we do this project?

Is the technology available to make it work?

Is it possible to achieve the proposal within the

performance criteria? Are there sufficient skilled technologists

available to staff this project?

Does the technology already exist within the

company so that the proposed tasks are alreadydone and we do not need this project?


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Systems DevelopmentConcepts

Method a prescribed set of tasks that uses specific

techniques and tools to complete a systemsdevelopment activity

Technique a way of doing a particular task in the systems

development process Tool

automated tools to help systems development


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Methodology

a collection of procedures, techniques, toolsand documentation aids which assistsystems developers to implementinformation systems

consists of phases which consist of sub-

phases helps developers plan, manage, control and

evaluate information systems projects

Avison and Fitzgerald (1995)

Systems DevelopmentConcepts


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SOCIAL FEASIBILITY

Do we want this project?

What are the repercussions and impacts onpeople in and outside the company?

Will the proposal influence working practices in afavourable way and improve working conditionsfor employees?

Are there costs to the environment, to society, tocompany culture?


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ECONOMIC FEASIBILITY

Can we afford this project? How much will this project cost financially? Do the benefits balance the capital outlay? Over what period will we pay back that outlay

and make a profit? We would estimate the financial cost, consider

the benefits, and analyse the balance in acost/benefit analysis using tried and testedaccountancy methods.


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OPERATIONAL FEASIBILITY

Can we handle the outcome of this project? Will the company cope with resulting change? Do we have or will we be able to obtain the

resources to make the end-product worthwhile inthe future?

Or is the company content with the currentposition?

Will the company be able to retrain/redistributeexisting staff or recruit additional personnel?


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Cost Estimation

Cost)l(HistoricaCostFuture f


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The Cost Estimating Process

Definition &

Planning

Data

Collection

Estimate

Formation

Review &

Presentation

Final

Document


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Make-or-Buy Decision

Alternatives Differential

Make Buy Cost to Make

Rental of equip. $15,000 ---- $15,000

Direct materials 5,000 ---- 5,000

Direct labor 24,000 ---- 24,000

Variable overhead 9,000 ---- 9,000

Purchase cost $66,000 ($66,000)

Relevant costs $53,000 $66,000 ($13,000)====== ====== ======

Decision: Manufacture parts in-house


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Keep-or-Drop

Differential

Keep Drop Amount to Keep

Sales $150,000 ---- $150,000

Variable expenses (67,500) ---- (67,500)

Contribution margin $ 82,500 ---- $ 82,500

Direct fixed expenses (85,000) ---- (85,000)

Relevant benefit/loss $ (2,500)======

Decision: Drop the Deluxe product line but investigate alternative

use of facilities. This analysis provides a benchmark for future

decisions.


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Special-Order DecisionsAssume the following price quotation sheet for the XYX Company who

has received an offer buy at $38 per unit.

Direct materials $12

Direct labor 14

Variable overhead 4

Variable selling and administrative 2

Fixed manufacturing 20

Total $52

Markup--50% 26

Target selling price $78

===

Important: XYZ Company has idle capacity and can produce the

special order without affecting its current production.


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Economic Feasibility Study

WIP/DIP


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Cost AnalysisExample

Capital Costs Vendor 1 Vendor 2

Application Software Licensing $ 2,099,522 $ 1,007,551

Interface Development 135,000 20,000

Vendor Services 398,400 159,310

System/OS and Hardware Costs 1,206,362 1,411,757

Capital Costs Subtotal $ 3,839,284 $ 2,598,618

5-Year Operating Expenses

Application Software $ 1,889,930 $ 1,019,073

Interfaces 111,600 23,852

System/OS and Hardware Costs 260,091 286,551

Operating Expenses Subtotal $ 2,261,621 $ 1,329,476

TOTAL 5-YEAR COSTS $ 6,100,905 $ 3,928,094


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ResultsCase Study

Year 1 Year 2 Year 3 Year 4

Cost $1,000,000 $200,000 $200,000 $200,000

Benefit 100,000 150,000 250,000 350,000

Difference $(900,000) $(50,000) $ 50,000 $150,000


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Net Present Value Example

Net Cash NPV of Net

Year 10% Col. Inflows Cash Inflows

1 0.909 $125,000 $113,6252 0.826 130,000 107,380

3 0.751 115,000 86,365

Total PV of net cash inflows $307,370Net initial investment 250,000

Net present value of project $ 57,370


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Net Present Value Example

The company is considering another investment.

Initial investment is $245,000.

Investment in working capital is $5,000.

Working capital will be recovered.

Useful life is three years.

Estimated residual value is $4,000.Net cash savings is $80,000 per year.

Expected return is 10%.


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FOR WHAT IS A FEASIBILITY STUDY USED?

Feasibility studies may be used for a variety of purposes, such as:

testing and comparing the viability of proposals

approaching financial institutions for project funding

examining the original brief in detail, prompting discussions of client objectives and thecost implications of various project options, as well as uncovering conflicts and issues sothat they may be resolved.

return on investment > return on alternative investments

revenues > mortgage payments + operation costs

E i F ibilit


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Economic FeasibilityShouldWe Build It?

Identify costs and benefits

Assign values to costs and benefits

Determine cash flow Assess financial viability

Net present value (NPV)

Return on investment (ROI) Break even point (BEP)

ECONOMIC FEASIB IL ITY


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ECONOMIC FEASIB IL ITY

Example

Costs to develop , maintain and operate

Benef i ts when operat ional

Break-Even po int (Cos ts = Benefi ts)


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HOW IS PROJECT FEASIBILITY ASSESSED?

1.Identify project costs and benefits

2. Make assumptions about the project and future economic conditions

Costs:

Land

Consultants

Construction

Environmental, social,cultural, political

Risk

Interest on capitalexpenditure

Benefits:

Superior design outcomes

Creation of magnet

Socio-cultural diversity

Eco-solution

Social or cultural capital

Higher return on investment


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Expected Value

Costs Benefits

Tangible

Intangible

***

*

**

***

*

**


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Assign Cost and Benefit Values

Difficult, but essential to estimate

Work with people who are most familiarwith the area to develop estimates

Intangibles should also be quantified If intangibles cannot be quantified, list and

include as part of supporting material


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Profit

The purpose of Product Development is to produce a goodor service that a customer will pay a sufficient price for toassure a profit.

Gross Profit=Price - Direct Cost Net Profit= Gross profit - allocated expenses

To assure a profit, companies act to produce products thatcan command the highest prices and cost the least to make

Any exceptions?


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What other product issues drive companiesbesides profits?

Valuation

Future earnings

Products in the pipeline

Acquisition potential Strategic fit of products with another company

Previous sales of equivalent company (comparables)

Break-up potential Value of a conglomerate as the sum of its parts

Tax consequences

Etc.


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Cash Flow

Required for business continuity

To pay expenses

To pay interest on debt

To pay dividends to stockholders To grow business

To invest in new programs, technologies

Equipment

Inventory and Receivables

Acquisitions etc. Best measure of financial performance

Used by Wall Street



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Investment Alternatives

The object is to take capital earned, borrowedor from investors and allocate it in a fashionthat earns the highest return for theshareholders of the company.

There needs to be an appropriate balance oflong and short term returns.

More complex and as simple as a matter ofdollars and cents.

Question:

What are some investment alternatives for a company?


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What are typical investment alternatives. . .

Invest in

product line aor product line b

Advertising

Information Systems

A new factory Buy-back companies stock

Acquisition

Employee bonus or salary raise

Hire more HR personnel

etc.,etc.

The Cri ter ia is:

Which investment(s) gives the highest return?

Determine Cash Flow:


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Determine Cash Flow:Assign Values to Costs and Benefits

Simple Cash Flow Method


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Assess Financial ViabilityNet Presen t Value

NPV = PV(future cash inflows)

PV(future cash outflows)

PV = Cash flow amount(1 + interest rate)n , where

interest rate = required return

n = number of years in future


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Assess Financial ViabilityReturn on Investment

ROI = NPV

PV(cash outflows)


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Cash Flow Method for Cost Benefit Analysis


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Total (benefits - costs)

Return on Investment Calculation

Total costs

RETURN ON INVESTMENT EQUALS

Divided by


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Net Present Value Calculation

(1 + interest rate)n

Some amount of money

NET PRESENT VALUE EQUALS

Divided by

Where n equals the number of periods


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Net Present Value of an Investment

Holds for all investments

Takes into account inflation, cost ofcapital, corporate expectations of return

Reduces all times to a common point

C f


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Calculation of Net Present Value

n

t

t

t

k

ANPV

0 1

Where k is the expected rate of return

A sub t is the cash flow in the period t

Choose the programs whose NPV ishighest consistent with strategy, r isk,

resource, etc.


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Calculation of Payback Period

0

10

n

tt

t

r

A

Where r = discount rate

is the cash flow in period t

tA

tA

tA

Preparing an economic


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Preparing an economicfeasibility study

Compare product Returns on Investmentexample: Sample business plan pro forma

Dollars

Time

(Years)


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To calculate NPV, first assume a cash flow

-4000

-2000

0

2000

4000

6000

8000

10000

1 2 3 4 5 6 7 8 9 10 11 12

Time (Years)

Cash

Flow

C l l ti f NPV d P b k P i d f


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Calculation of NPV and Payback Period of aninvestment

Year Cash Discounted Cash Flow Discount rate

1 -1000 (909)$ (909)$ 10%2 -2000 (1,653)$ (2,562)$

3 -3000 (2,254)$ (4,816)$

4 -1000 (683)$ (5,499)$

5 0 -$ (5,499)$

6 1000 564$ (4,934)$

7 2000 1,026$ (3,908)$

8 6000 2,799$ (1,109)$

9 10000 4,241$ 3,132$

10 5000 1,928$ 5,060$

11 2000 701$ 5,761$

12 2000 637$ 6,398$

Net Present Value= 6,398$

Payback 9 years

Assume all cash is spent at end of perid

-$

Calculation of NPV and Payback Period of an


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Calculation of NPV and Payback Period of aninvestment

Year Cash Discounted Cash Flow Discount rate

1 -1000 (769)$ (769)$ 30%2 -2000 (1,183)$ (1,953)$

3 -3000 (1,365)$ (3,318)$

4 -1000 (350)$ (3,668)$

5 0 -$ (3,668)$

6 1000 207$ (3,461)$7 2000 319$ (3,142)$

8 6000 736$ (2,407)$

9 10000 943$ (1,464)$

10 5000 363$ (1,101)$

11 2000 112$ (990)$

12 2000 86$ (904)$

Net Present Value= (904)$

Payback never breaks even

Assume all cash is spent at end of period

Calculation of Internal Rate of Return (IRR) for


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Calculation of Internal Rate of Return (IRR) fora project

Calculate a discount rate (k) that reducesthe NPV of a project to zero

n

t

t

t

k

ANPV

0 10

C l l ti f I t l R t f R t IRR) f


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Calculation of Internal Rate of Return IRR) of aninvestment

-1000

-500

0

500

1000

1500

20 21 22 23 24 25 26 27 28 29

NPV($) Vs

Discount Rate

(%)

IRR=24.3%


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Value analysis (VA)

Can we do without it? Does it do more than is required?

Does it cost more than it is worth?

Can something else do a better job?

Can it be made by a less costly method?

with less costly tooling?

with less costly material?

Can it be made cheaper, better, or faster bysomeone else?


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Sensitivity Analysis

Reduce (Increase) Price

Change Product Development Time

Consider competitive response

Some thoughts on how to increasefit


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profitsP=SP-C

1. Increase Selling PriceIncrease Customer Value Put extra features in product which require little marginal cost

Provide extra service

Target less competitive segment of the market

Get to market before competition Price at the maximum the customer is willing to pay

Pr ice models should ref lect cu stomer value- not cos t

(except in g overnment con tracts i f yo u w ish to avoid jai l

Note in English gardening magazine: Even though seed sales are

at an all time high, the price is not expected to come down

Some thoughts on how to increaseprofits


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Why?

profitsP=SP-C

2. Decrease Selling Price

Some thoughts on how to increase profitsP=SP C


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Do it right the first time Dont commit to detailed design until you have customers specs firm

then dont change

Build a manufacturable product. Bring manufacturing in early

Dont overload with features that the customer doesnt want that are

costly to develop Manage tightly to schedule with appropriate risk and risk reduction

plans

Use rigid phase exit criteria

All of these consistent with Fast C/T

P=SP-C3. Decrease Product Development (NRE) and

Manufacturing (RE) costs

ome oug s on ow o ncreaseprofits


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Effect on product price in being first tomarket?

Effect on total revenue of turning outproducts faster?

Effect on Cost?

profitsP=SP-C

4. Decrease Cycle Time for product Development


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P tf li A l i


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Portfolio Analysis

Reward

(NPV)

Risk

Game Changers

KillBread and Butter

Pearls

A Portfolio of 6 programs


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D

C

B

A

Reward

(NPV)

Risk

Kill

GameChangers

Bread and Butter

Pearls

A Portfolio of 6 programs

G

F

Note: area = program cost

H d ll t ?


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How do you allocate?

Not by NPV and Payback Period alone

But. . .

Portfolio Balance (long/short)

Strategically Important vs Tactically Important

Product Families and Platforms

Future Sales Model

Available Resource

People and Dollars Customers demands

D t f R k d d Li t


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Data for Rank ordered List

Project Name IRR NPV Strategic

Importance

Probability of

Technical Success

Alpha 20% 10.0 5 80%

Beta 15% 2.0 2 70%

Gamma 10% 5.0 3 90%

Delta 17% 12.0 2 65%

Epsilon 12% 20.0 4 90%

Omega 22% 6.0 1 85%

Rank Ordered by discounting


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Rank Ordered by discountingreturns by probability of success

Project Name IRR NPV Strategic

Importance

Ranking Score

Alpha 16.0 (2) 8.0 (2) 5 (1) 1.67 (1)

Epsilon 10.8 (4) 18.0 (1) 4 (2) 2.33 (2)

Delta 11 (3) 7.8 (3) 2 (4) 3.33 (3)

Omega 18.7 (1) 5.1 (4) 1 (6) 3.67 (4)

Gamma 9.0 (6) 4.5 (5) 3 (3) 4.67 (5)

Beta 10.5 (5) 1.4 (6) 2 (4) 5.0 (6)

Whatever the methodology, the


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gy,choices you make have an Opportunity

Cost

Program Development Resource is alwaysfinite

Most companies with good engineering and

marketing resource are in a target richenvironment How expensive is it to develop the

Technology vs other choices?

Consider, allocation is a zero sum game. An investment that ties up resource- even agood investment (High NPV) can crowd outa better (sometimes much better) investment


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R t I t t


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Return on Investment Return on Investment (RoI)

RoI is the simplest, and one of the most frequently used, measures offinancial feasibility. It delivers a percentage figure that can becompared against prevailing interest rates, in order to assess whetherthe proposed investment is financially worthwhile.

The basic formula is:

RoI = (Net Benefit / Investment) x 100 Where Net Benefit = the sum of tangible benefits Total costs,

including annual running and development costs.

Standards vary from organisation to organisation as to what period thecosts and benefits are measured. A common standard is to use the

sums of annual costs and benefits over a four-year period; another is touse the costs and benefits over the expected life of the solution.

Standards also vary as to what RoI rate is acceptable, with values suchas twice bank base rate, or base rate plus 5% being fairly typical.

P b k P i d


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Payback Period

Payback Period Another common measure is that of Payback Period. This is a measure

of when sufficient benefits will have accrued to cover both the initialinvestment costs and the on-going running costs of the solution.

For example a project with an investment cost of 120,000, annualrunning costs of 20,000, and annual benefits of 50,000 will pay back

the investment in 4 years.

In assessing overall cost benefit, measures such as RoI and PaybackPeriod will frequently be used in combination, and viewed differently bydifferent organisations.

For example some might view a RoI of 20% with a pack back of 2 years

as preferable to a RoI of 30% with a Payback Period of 4 years,depending on their strategic aims and current financial position.

For a full description of these methods the reader is referred to a text such as Robson (1997).

1. Systems Development Costs (one-time; representative only)

Personnel:


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Personnel: 2 Systems Analysts (450 hours/each @ $45/hour) $40,500 5 Software Developers (275 hours/each @ $36/hour) 49,500 1 Data Communications Specialist (60 hours @ $40/hour) 2,400

1 Database Administrator (30 hours @ $42/hour) 1,260 2 Technical Writers (120 hours/each @ $25/hour) 6,000 1 Secretary (160 hours @ $15/hour) 2,400 2 Data Entry clerks during conversion (40 hrs/ea @ $12/hr) 960

Training: 3 day in-house course for developers 7,000

User 3 day in-house course for 30 users 10,000

Supplies: Duplication 500 Disks, tapes, paper, etc. 650

Purchased Hardware & Software: Windows for 20 workstations 1,000 Memory upgrades in 20 workstations 8,000 Mouse for 20 workstations 2,500 Network Software 15,000 Office Productivity Software for 20 workstations 20,000

TOTAL SYSTEMS DEVELOPMENT COSTS: $161,670


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2. Annual Operating Costs (on-going each year)

Personnel: Maintenance Programmer/Analyst (250 hrs/year @ $42/hr) $10,500 Network Supervisor (300 hrs/year @ $50/hr) 15,000

Purchased Hardware & Software Upgrades: Hardware 5,000 Software 6,000

Supplies and Miscellaneous items 3,500

TOTAL ANNUAL OPERATING COSTS: 40,000

-----------------------------------------------------------------------------------------------------------

TOTAL COST TO DEVELOP AND OPERATE THE SYSTEM: $201,670==========

TANGIBLE BENEFITS


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Fewer processing errors

Increased throughput

Increased response time

Elimination of job steps

Reduced expenses

Increased sales

Faster turnaround

Better credit

Reduced credit losses

Reduction of accounts receivables

TANGIBLE BENEFITS

Equate these

to Do llars ($)

INTANGIBLE BENEFITS


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Improved customer goodwill

Improved employee morale

Improved employee job satisfaction

Better service to the community

Better decision making

INTANGIBLE BENEFITS

Equate these

to Dollars ($)

BREAK EVEN (PAYBACK) ANALYSIS


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Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Development Costs (161,670) - - - - -

Operational Costs - (40,000) (40,000) (40,000) (40,000) (40,000)

Tangible Benefits - 50,000 55,000 60,000 65,000 70,000

Intangible Benefits - 20,000 25,000 30,000 35,000 40,000

Benefit (Cost) (161,670) 30,000 40,000 50,000 60,000 70,000

Cum Benefit (Cost) (161,670) (131,670) (91,670) (41,670) 18,330 88,330

* This simple example does not consider the Time-Value of Money

Break Even (Payback) Analys is Exam ple*

Cum Benefit (Cost)

(161,670)(131,670)

(91,670)

(41,670)

18,33088,330

(200,000)

(150,000)

(100,000)

(50,000)

-

50,000

100,000

150,000

0 1 2 3 4 5

Cum Benefit

(Cost)

Pump Replacement


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Assumptions/Calculations: The ideal pump produces 0.5HP as determined by our calculations

Calculations were based on an ideal impeller pump

Average Annual Costs are constant

Pump Maintenance Technicians cost $18 per hour

Interest rate is 4%

Centrifugal Pump maintenance is a percentage of the initial costplus the cost of a Maintenance Technician

Pump Replacement

Axial Pump


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Axial Pump

Model: 607-3

Initial Cost: $4400

Maintenance /

year: 6 to 10 hrs labor

Pump

MaintenanceTechnician: $18 per hr

Total Yearly

Cost: $100


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Diaphragm Pump


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Diaphragm Pump

Model: LLC-1010

Initial Cost: $2399

Maintenance /

(9/12) Year $284 Repair Kit

$100 Technician

Total

Maint/Year $512


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Our Decision


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Our Decision

Carry Manufacturings Axial Flow Pump(Model 607-3) is the most cost effectivemodel for our application.

This holds true even when: APR = 6%

APR = 2%


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Organizational Feasibility


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If we build it, will they come?

Strategic alignment How well do the project goals align with

business objectives?

Stakeholder analysis Project champion(s)

Organizational management

System users

ETHICAL CONSIDERATIONS


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How do you identify all those who are or may be affected by the project?

Who is the client?

How do you evaluate community impact (cost and/or benefit)?

What effects will the new project pose to the environment?

What is the most appropriate land use? The most efficient use of materials,of energy?

Goals and success criteria of project


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management

The project is on time

The project is run in cost-effective manner

The resources are used efficiently

Project outcome is verified and ready for validation

Customeris satisfied with the project and its

outcome

Project team members are satisfied with the project

and its outcome

Project management - needed knowledge


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j g g scope management

time management

cost management

quality management

resource management

integration management

communication management

risk management

subcontracting management

problem management processes and work methods

leadership skills


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Thank you foryour attention !

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Feasibility Study - Eng.ppt

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