Page 98 - DCAP304_DCAP515_SOFTWARE_PROJECT_MANAGEMENT

Software Project Management

Notes
Example: A simple cost/benefit analysis of a road scheme would measure the cost of
building the road, and subtract this from the economic benefit of improving transport links. It
would not measure either the cost of environmental damage or the benefit of quicker and easier
travel to work.

4.6.1 Mistakes and Problems with Cost-benefit Analysis

A frequently made mistake in the CBA method is to use non-discounted amounts for calculating
the costs and benefits. A method like NPV or Economic Value Added or CFROI is strongly
recommended, because all of these account for the time value of money.
A frequent problem with CBA is that typically the costs are tangible, hard and financial, while
the benefits are hard and tangible, but also soft and intangible. Caution should be taken here
against people who claim that “if you can’t measure it does not exist/it has no value”.
Especially in more strategic investments, frequently the intangible benefits clearly outweigh
the financial benefits.
Risk must often be considered as a factor in making the decision.

Did u know? What is NPV?
In finance, the net present value (NPV) or net present worth (NPW)[1] of a time series of
cash flows, both incoming and outgoing, is defined as the sum of the Present Values (PVs)
of the individual cash flows of the same entity. In the case when all future cash flows are
incoming (such as coupons and principal of a bond) and the only outflow of cash is the
purchase price, the NPV is simply the PV of future cash flows minus the purchase price
(which is its own PV).

4.6.2 History of Cost Benefit Analysis

The idea of this methodology originated with Jules Dupuit, a French engineer whose 1848
article is still worth reading. The British economist, Alfred Marshall, conceived some of the
formal concepts that are at the foundation of CBA. But the practical development of CBA
came as a result of the impetus provided by the Federal Navigation Act of 1936. This act
required that the U.S. Corps of Engineers carry out projects for the improvement of the
waterway system when the total benefits of a project exceed the costs of that project. Thus,
the Corps of Engineers had create systematic methods for measuring such benefits and
costs. The engineers of the Corps did this without much assistance from the economics
profession. It wasn’t until about twenty years later in the 1950s that economists tried to
provide a rigorous, consistent set of methods for measuring benefits and costs and deciding
whether a project is worthwhile.

Example: A sales director is deciding whether to implement a new computer-based
contact management and sales processing system. His department has only a few computers,
and his salespeople are not computer literate. He is aware that computerized sales forces are
able to contact more customers and give a higher quality of reliability and service to those
customers. They are more able to meet commitments, and can work more efficiently with
fulfillment and delivery staff.

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