Feasibility Analysis

FEASIBILITY ANALYSIS

Feasibility is the measure of how beneficial or practical the development of an information system will be to an organization.

Feasibility analysis is the process by which feasibility is measured. Feasibility should be measured throughout the life cycle. The scope and complexity of an apparently feasible project can change after the initial problems and opportunities are fully analyzed or after the system has been charged.

The first feasibility analysis is conducted during the scope definition phase. At this early stage of the project, feasibility is rarely more than a measure of the urgency of the problem and the first cut estimate of development cost.

After estimating the benefits of solving the problems and opportunities, analyst estimate the costs of developing the expected system.

Feasibility analysis usually considers a number of alternative solution to develop an information system, one of which is chosen as the most satisfactory solution. Feasibility analysis commences once the project goal is set.

Feasibility analysis involves three key considerations. These are :

  • Economic Feasibility
  • Technical Feasibility
  • Behavioural Feasibility
  • Economic Feasibility : As the name suggest, it deals with the term of money. It is the most frequent method for evaluating the effectiveness of candidate system. Cost Benefit Analysis is done to determine the benefits and savings that are expected from the. candidate system and compare them with cost.
  • Technical Feasibility : The possibility that organization has or can procure the necessary resources. This is demonstrated if the needed hardware and software are available in the market place or can be developed by the time of implementation.
  • Behavioural Feasibility : People are inherently resistant to change, and computers have been known to facilitate change. So, it is understandable that introduction of candidate system requires special effort to educate, sell and train the staff on new ways.

A feasibility analysis is conducted to select the Best System that meet performance requirements. This entails the identification description, an evaluation of candidate system, and the selection of best system for the job.

A systems required performance is defined by a statement of constraints, the identification of the specific system objective and a description of outputs. The analyst is then ready to evaluate the feasibility of candidate system to produce these outputs.

Feasibility is the determination of whether or not a project is worth taking up. The process followed in making this decision is called a feasibility study. This type of study determines if a project can and should be taken. Once it has been determined that a project is feasible the analyst can go ahead and prepare the project specification which finalizes project requirements.

Feasibility Study ;s carried out to select the best system that meets performance requirements.

Feasibility. It is a measure of how beneficial the development of an information system would be to an organisation.

Feasibility Analysis

It is a process by which we measure feasibility. It is an on going evaluation of feasibility in the life cycle.

Feasibility Focuses on :

  1. What are the user’s demonstrable needs, how does a candidate system meet them ?
  2. What resources are available for given system. Is the problem worth solving ?
  3. What the likely impact of the systeM on the organisation.? How well does it fit within theorganisation’s ?

Each of these questions must be answered carefully. They revolve around investigation and evaluation of the problem, identification and description of system, specification of performance and the cost of each system, and final selection of the best system

The objective of feasibility study is not to Solve the problem but to acquire a sense of its scope. During the study, the problem definition in crystallized and aspects of the problem to be included in the system are determined. Consequently, costs and benefits are estimated at this stage.

Categories or Considerations of Feasibility Study  .

  1. Technical Feasibility : Technical feasibility is the measure of how much practicable the solutions are and whether the technology is already available to the firm and to what extent it can support the proposed system. It also looks at whether it can be The analyst must find out whether current technical resources which are available in the organisation are capable of handling the user’s requirements.
  2. Economic Feasibility : It is the most frequent used method for evaluating the effectiveness of system. It is a measure of whether a solution was .pay for itself or how profitable a solution will be.

Economic or financial feasibility is the determination of the resources. The resources

are

  • Management time
  • Time spent by the system analysis team
  • Cost of doing the full systems study        •
  • Estimated cost of hardware.
  • Estimated cost of software/or software development.

 

  1. Operational Feasibility : Once it is determined that the system is both technically and economically feasible then it has to be seen if it is operationally feasible. It is the measure of solution acceptability. It is the measure of how the end users and managers feel about the problems or solution.
  2. Social Feasibility : It is the determination of whether a proposed project will be acceptable to the people or not. This determination examines the probability of the project being accepted by the group directly.
  3. Management Feasibility : It is the determination of whether a proposed project will he acceptable to the management people or not. If the management does not accept or gives a negligible support to it, the analyst will tend to view the project as non-feasible.
  4. Legal Feasibility : It determines whether the proposed. project infringes on known Acts and Legislations etc.
  5. Time Feasibility : It determines whether the proposed project can be implemented fully within a stipulated time frame. It a project takes too much time it is likely to be
  6. Behavioural Feasibility : It determines the reaction the user staff will have towards the development of the computerized system.

It determines how much effort will go into educating, selling and training the user staff on the system

Steps in Feasibility Analysis

Feasibility analysis involves 7 steps :

  1. Form a project team and appoint a project leader : System study requires project team, which consists of “analysis and user staff’, where senior system analyst ;s appointed as project leacher. Sometimes outside consultant and information specialist also join. Meetings are held to accomplish the mission and to select the best candidate Progress records are kept of each meeting.
  2. Prepare System Flowcharts : Here the generalized system flowcharts are Information oriented charts of first phase (System study) provide inputs and outputs in existing system.
  3. Enumerate Potential Candidate System
  • Candidate system is identified which is capable or producing output.
  • Transformation of logical to physical system model occurs.
  • Hardware is considered here.
  1. Describe and Identify ‘Characteristics of Candidate System : Since with the technical knowledge and expertise in H/W & S/W, it is difficult to judge what a candidate system can and cannot do.

So, from the considered candidate system, the team begins a preliminary evaluation, to reduce it to manageable form.

  1. Determine and Evaluate Performance and Cost Effectiveness of each candidate System :
  • System Performance is evaluated against-the system performance requirement. (req. which were collected before feasibility study.
  • In Performance the

 

  • — qualitative measures are taken
  • — quantitative measures are taken
  • Qualitative—On the basis of system accuracy, growth potential.
  • Quantitative— On the basis of designing, installing, user training, updating, physical facilities.
  1. Weight System Performance and Cost Data :
  • Sometimes it is difficult to determine the best candidate system by measuring the performance and cost thereof.
  1. Select the Best Candidate System :
  • The system with the highest total spore is judged the best system and is finally
  1. Feasibility Report :
  • Termination of feasibility study is the feasibility report
  • Format is prepared—may depend on user and system
  • Most formats begin with the summary of findings and recommendations followed by documents details.

Cost/Benefit Analysis

From the analysis, system design requirements are identified and alternative systems are evaluated. The analysis of the costs and benefits of each alternative guides the selection process. Therefore, a knowledge of cost and benefit categories and their evaluation methods is important. Costs/Benefits analysis gives a picture of various costs, benefits and rules associated with each alternative system.

Cost fall in two categories :

  • Costs associated with developing the system : Costs which are associated with developing the system, can be estimated from the outset of a project and should be reviewed at the end of each phase of the project.
  • Costs associated with operating system : Costs which are associated with operating a system, can be estimated only once specific computer-based solutions have been defined (during the selection phase or later).

Cost and Benefit Categories

In developing cost estimates for a system, we consider several cost elements_such as

  • Facility Costs : These are expenses incurred in the preparation of the physical site where the application or the computers will be in operation.
  • Hardware : Costs related to the actual purchase or lease of the computer and peripherals (e.g., printer, disk drives, tape unit).

(3). Supply Costs : These are variable costs that increase with increased use of paper, ribbons, disks. They should be estimated and included in the overall cost of the system. This includes the equipment costs also.

  • Training Costs : If the computer personnel or end-users have to .be trained, the training courses may be charged out on a flat fee per site, a student fee, or an hourly fee.
  • Operating Costs : It includes all costs associated with the day-to-day operation of the system. The amount depends on the number of shifts, the ‘nature of the applications, and the caliber of the operating staff.
  • Supply Usage Cost : Computer time will be used for one or more of the following activities : programming, testing, conversion, word processing, maintaining a project dictionary, prototyping, loading new data files etc.
  • Personnel Costs : It includes EDP staff salaries and benefits (health insurance, vacation time, sick pay, etc). as well as pay for those involved in developing the system. The salaries of systems analysts, programmers, consultants, data entry personnel, computer operator, secretaries, and the like who work on the project make up the personnel costs.

Benifits

The two major benefits are :

  • Improving performance : The performance category emphasizes improvement in the accuracy of or access to information and easier access to the system by authorized
  • Minimizing• the cost of processing : Minimizing costs through an efficient system-error control or reduction of staff is a benefit that should be measured and included in Cost Benefit Analysis.

Procedure for Cost/Benefit Determination

Costs are incurred throughout its Life cycle. Benefits are realized in the form of reduced operating costs, improved corporate image, staff efficiency or revenues.

Cost/Benefit analysis is a procedure that gives a picture of the various costs, benefits and rules associated with a system. The determination of costs and benefits entails the following step :

  1. Identify the costs and benefits overtraining to a given project.
  2. Categorise the various costs and benefits for analysis.
  3. Select a method of analysis.
  4. Interpret the results of the analysis.
  5. Take action.

Cost and Benefit Identificaiion

Some costs and benefits are easily identified, e.g., direct costs, i.e., price of hard disk. Direct benefits often relate one-to-one to direct costs, e.g., savings from reducing costs.

Another category of cost and benefit that is not easily discernable is opportunity cost/benefit. A cost that measures the opportunity which is cost or sacrificed, when choice of one course of action requires that a on alternative choice of action be given up. It is the benefit foregone by not choosing the next best alternative in a given decision making situation.

When one course of action is taken, the other possible course is left out. As a result, the benefits that would accrue are given up. To the extent the benefits forgone can be quantified they represent the opportunity costs. Opportunity costs are hypothetical costs and therefore they do not enter accounting records. They are relevant for decision-making.

For example, suppose the company owns a building which can be used in the business or rented out. If the company chooses to use the building for business purposes, the rent forgone by not letting it out is the opportunity cost of using the building for business purposes.

This cost losses its importance or significance once decisions are mad. During decision making process, these costs provide a comparable base to evaluate alternatives.

Classification of Costs/Benefits

Next step in Cost/benefit determination is to categorize costs and benefits. They may be tangible or intangible, direct or indirect, fixed or variable.

  • Direct or Indirect Costs and benefits

Direct Costs : Are those which can be directly identified with a product, process or department. All those costs incurred in producing a product or offering a service which can be directly “identified” with or “traced” to that product or service are called of direct costs.

Direct costs are those with which can be directly associated in a project. They are applied directly to the operation, e.g., cost of sugarcane in the manufacture of sugar, cost of timber hi manufacture of furniture, salaries of product manager.

Indirect Cost : Those costs which cannot be easily identified with or traced to a product or service, are called indirect costs, or they may also be called as “Overhead” costs.

e.g, depreciation of machinery, Cost of Lubricants used for smooth running of machines, wages paid to all work force who supervise production of more than one product.

Direct benefits : The benefits which can be specifically attributable to a given project e.g., a new system that can handle 25% more transaction per day is direct benefit.

Indirect Benefits : The benefits that are realized as a by-product of another activity or system.

  • Fixed or Variable Cost/Benefits

Behaviour of cost in relation with the level of activity (usually production activity) forms the basis for the distinction between fixed and variable costs.

Variable Cost : All those costs that vary in direct proportibn to the volume of activate are called variable costs.

Variable costs vary in proportion to tile change in the volume of production. This states that per unit cost remains relatively constant but the total cost increases with increase in production and decreases with decrease in production.

When there is no production, no variable ‘ost is incurred e.g., raw materials,•wages, fuel, power, packing expenses, carriage, etc.

Fixed Costs : Fixed Costs are those that remain the same within a certain range in the level of activity. They have to be incurred even if there is no production and therefore are also called shutdown or start by costs.

Example of fixed costs are— insurance, depreciation, rent, rates etc. Within the production capacity established the fixed costs remain the same irrespective of the level of activity. Therefore, while the Cost total fixed costs remain the same, the fixed cost per unit changes with change in output level. With the increase in production level, the fixed cost open unit decreases because it gets distributed over a larger number of units.

Fixed and Variable Cost

Variable benefits : These are realized on a regular bads.

Fixed benefits: These are constant and do not change, e.g., decrease in number of personnel by 20% resulting from. the use of a new computer. The benefit of personnel savings may recur every month.

(c) Tangible or Intangible Costs/Benefits

Tangibility refers to the ease with which .costs and benefits can be measured.

Tangible Cost : An outlay of cash for an specific item or activity is called tangible cost. They can be identified and measured. e.g., I-1/W and S/W cost.

Intangible Cost : Costs that are known to exist but whose financial value cannot be accurately measured. It is easy to identify but difficult to measure. e.g., lowered company’s image.

Tangible Benefits : Those which are quantifiable.

Intangible Benefits : Those which are not easily quantified.

Select the Evaluation Method

When all financial data have been identified and broken down into cost categories, the analyst must select a method of evaluation.

Evaluation methods are

  1. Net Benefit Analysis
  2. Present Value Analysis
  3. Net Present Value
  4. Payback Analysis
  5. Break-even Analysis
  6. Cash-flow Analysis

 

1. Net benefit Analysis : It involves subtracting total costs from total benefits.

2. Present Value Analysis : It calculates costs/benefits of the system in terms of today’s value of the investment and then comparing across alternatives.

To compute the present value, we use the formula P= F/(l+i)n

3. Net Present Value : The net present value is represented as a percentage of investment.

4. Payback Analysis : Where there is not profit; no loss condition occurs:

Payback Period = Investment/Cash inflow

5. Break-Even Analysis : Where there is no profit, no foss condition occurs.

Break-Even Point =  Fixed Cost/Sales Per Unit — Variable Cost Per unit

6. Cash-flow Analysis : It is total revenue minus the total expenses on a period-by-period basis.

Leave a Reply

Your email address will not be published. Required fields are marked *