Presidency College, Brahmapur System Analysis & Design (3.

3)

Unit-III
FEASIBILITY STUDY
INTRODUCTION
A feasibility analysis involves a detailed assessment of the need, value and practicality of a proposed
enterprise, such as systems development. The process of designing and implementing record-keeping
systems has sufficient accountability and resource. Implications for an organization. Feasibility analysis will
help you make informed and transparent decisions at crucial points during the developmental process to
determine whether it is operationally, economically and technically realistic to proceed with a particular
course of action. .
The purpose of this document is to raise awareness about feasibility analysis in the context of your project.

TYPES OF FEASIBILITY
A feasibility analysis usually involves a through assessment of the operational (need), financial (value) and
technical (practically) aspects of a proposal. In systems development projects, business managers are
primarily responsible for assessing the operational feasibility of the system and Information Technology
(IT) analysts are responsible for assessing technical feasibility. Both then work together to prepare a
cost/benefit analysis of the proposed system to determine its economic feasibility.

Financial (Economical) Feasibility:

A system development project may be regarded as economically feasible or good value to the organization
if its anticipated benefits outweigh its estimated costs.
Economic analysis is carried out to determine the benefits and savings that are expected from a candidate
system and compare them with costs. If benefits outweigh costs, then a decision is made to design and
implement the system. Otherwise further alterations in the proposed system are made to improve its
economic viability.
Many organizations assess projects on an economic basis alone, i.e. they must show financial returns that
exceed the costs. Therefore, management gives more importance to economic feasibility than to technical
and operational feasibility.
However many of the organizational benefits arising from record-keeping projects is intangible and may be
hard to quantify.

Examples of intangible benefits include:

• Improved compliance with legislative and regulatory requirements.
• Better management of evidence-related risks.
• Enhanced public image.
• Improved consistency, continuity, efficiency and productivity in program delivery,
management and administration.
• Greater protection of the rights of employees, clients and citizens.
A system can prove to be highly beneficial to an organization. For example, a new information
system can mechanize jobs, reduce errors, provide new and improved services to customers, and enhance
organizational efficiency, speed, flexibility and morale. Benefits can be categorized into tangible and
intangible benefits. Tangible benefits refer to items that can be measured in quantitative terms. For
example, reduced manpower expenses, lower transaction costs, etc. Intangible benefits refer to items that
cannot be measured or quantified easily. For example, improvement of employee morale.
An information system can have both tangible and intangible costs. Tangible costs are those items that
can be measured easily and with certainty. Intangible costs, on the contrary, refer to items that cannot be
quantified or measured easily. Several guidelines have been identified for improving the cost-estimating
process-which forms an important part of the system development. Some of the guidelines are as follows:
• Finalize the initial estimates after thorough study.
• Control user changes.
• Check the progress of the proposed project.
• Evaluate the project personnel using the estimate.
• Consider the cost estimate carefully before approving it.
• Base your judgment on documented facts and figures and not on intuition.

Technical Feasibility:
A systems development project may be regarded as technically feasible 'practical' if the organization has
necessary expertise and infrastructure to develop, install, operate and maintain the proposed system.
Organizations will need to make this assessment based on:
• Knowledge of current and emerging technological solutions.
• Availability of technically qualified staff in-house; for the duration of the project and subsequent
maintenance phase.
• Availability of infrastructure in-house to support the development and maintenance of the
proposed system.
• Where necessary the financial and/or technical capacity to procure appropriate infrastructure and
expertise from outside.
• Capacity of the proposed system to accommodate increasing levels of use over the medium term.
• Capacity of the proposed system to meet .initial performance expectations and accommodate

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new functionality over the medium system.

Operational Feasibility
Operational feasibility deals with human, organizational and social aspects. Its purpose is to gain insight
into the degree to which the proposed system will solve the business problems. The questions that find
answers in the assessment of operational feasibility are:
• What job changes will the system bring? People are inherently resistant to change and computers
have been known to facilitate change. An estimate should be made of how strong a reaction the
user staff is likely to have towards the development of a computerized system.
• What organization structures are impacted?
• What new skills will be required? If the current employees do not posses these skills, how long will
they take to learn the same?

Operational feasibility must determine how the proposed system will fit in with the current operations and
what, if any, job reconstruction and retraining will be needed to implement the system.
The evaluation must then determine the general attitudes and job skills of existing personnel and whether
any such restructuring of jobs will be acceptable to the current users.
The operational feasibility deals with willingness and capability of users to use and benefit from the
proposed system.

COST-BENEFIT ANALYSIS

Cost-benefit analysis is a tool for evaluating the effectiveness of the project. It may be used by the
management to decide as to what extent benefits outweigh the costs. The costs associated with the
proposed business system are the expenses arising from developing, installing, training and implementing
the system. The benefits are the advantages gained, including money savings, from implementing the
proposed system.
The primary objective of cost-benefit analysis is to find out whether it is economically worthwhile to
invest in the proposed project. If the return on the investment is high, then the project is considered
economically worthwhile.
The three types of costs and benefits are:
(a) Tangible or intangible
(b) Fixed or variable
(c) Direct or indirect

Tangible and Intangible Costs and Benefits

Tangible means that which is definite and can therefore be determined in advance. Tangible cost means
that it is known and can be estimated quite accurately. For example, the cost of salary of employees, the
expense of specific piece of equipment, would be tangible cost.
Intangible cost refers to something which we know exists, but financial value of which cannot be accu-
rately assessed. For example, the cost of breakdown of an on-line banking system for one hour would
cause the bank to lose the deposits and waste human resources. Exact cost of this cannot be estimated
immediately.
Benefits are also classified as tangible and intangible benefits. Tangible benefits, like costs, are not difficult
to specify accurately. For example completing jobs in fewer hours or producing reports without errors are
quantifiable. However, benefits such as more satisfied customers or an improved corporate image or faster
response to customer inquiries or better working conditions are not easily quantified. These are all
intangible benefits.
Fixed or Variable Costs and Benefits
Costs that are constant and do not change are fixed costs. For example, rent to be paid is a fixed cost.
Another example would be, if company purchases computer hardware, the cost is fixed, whether or not it
is wholly used to run a system.
Costs can also be variable. Variable costs are those that are incurred periodically and vary with the volume
of work. For example, the cost of stationery and floppies during project development would amount to
variable cost.
Like costs, benefits can also be fixed or variable. Fixed benefits are constant and do not change. An
example is a decrease in the number of employees by 20 percent resulting due to the use of a new com-
puter system would be called as fixed benefit. The benefit of personnel savings may recur every month.
Variable benefits, on the other hand, are realized on an irregular basis. For example, consider a safe
deposit tracking system that saves 20 minutes preparing customer notices compared with the manual
system. The amount of time saved with the number

Direct or Indirect Costs and Benefits

Direct costs are those costs directly associated with the system that are incurred in buying equipment,
employing people, cost of consumable items, rent for accommodation etc.
Indirect costs are the result of operations that are not directly associated with a given system or activity.
For example, heating or air conditioning, insurance and cost of maintenance etc. Indirect costs are often
referred to as overheads.

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Benefits can also be direct or indirect. A new system that can handle 25% more transactions per day is
giving a direct benefit.
Indirect benefits are achieved as a by-product of another activity or system. For example, a system that
tracks sales-calls on customers provides an indirect marketing benefit if it provides additional information
about competition.

COST CATEGORIES
There are five major cost elements, which are associated with system development. These are:
(a) Equipment cost for the new system
(b) Operating cost
(c) Personnel cost
(d) Material cost
(e) Conversion cost

Equipment Cost for the New System

Equipment cost includes various items of computing equipment associated with the work. It also includes
accommodation and furniture costs.

Operating Cost
Operating cost includes the expenses to run the system. Operating cost depends on the amount of time
taken for a process. Air-conditioning and electricity charges would be included in this category.
Personnel Cost
Personnel cost includes the salaries and wages of analysts, designers, programmers, operators, con-
sultants etc.
It also includes the cost to train system users. Salary may be on hourly basis or the entire salary for the
duration of the project.

Material Cost
Material cost includes cost of stationery, paper, ribbons, floppies, etc. It also includes cost of production of
the literature and operating documents.

Conversion Cost
Conversion cost includes that of designing new forms and procedures, expenditure to prepare the site for
using the new system. Cost of parallel running of existing and new systems is also to be included.

BENEFIT CATEGORIES/ANALYSIS
The costs and benefits are used to determine whether a project is economically feasible. There are six
popular techniques to assess economic feasibility.
These are:
(a) Payback analysis
(b) Return on investment (ROI) analysis
(c) Present value analysis
(d) Net Present value analysis
(e) Break even analysis
(f) Cash flow analysis

Payback Analysis
Payback analysis is used to determine how long it will take for a system to generate enough savings to
cover developmental cost. Payback analysis defines the time required to recover the money spent on a
project.

Return on Investment (ROI)

The return on investment (ROI) analysis method compares the lifetime profitability of alternative solutions
of projects. The ROI product is a percentage rate that measures the relationship between the amount the
business gets back from the investment and the amount invested.

Present Value Analysis

The present value analysis determines how much money it is worthwhile investing now, in order to receive
a given return in some years' time. In the present value analysis, the costs and benefits of a system are
calculated in terms of the value of the investment today and then compared with future returns.

Net Present Value

The present value analysis when carried out for the net benefit (benefit-cost) is called the net present
value. Time-value of money is used for both costs and benefits.
Net present value is a well-defined and practiced method of economic evaluation. It builds on an allowance
for the 'time' value of money, represented by the present value factor. In this method the net cash flows
are reduced in value by applying this factor, thus reducing the value of a cash flow to its present worth.

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Break Even Analysis

The point at which the cost of the new system and present one are equal is known as Break-even point.
The break-even point is the time at which the cost of the new system equals the cost of the current one. In
general, the new system will have initial cost due to the development expenses that are higher than the
cost of the current one. At break-even point, both systems are equal in their cost. After the break-even
point the new system typically shows benefits as compared to the old one.
The period before the break-even point is called investment period, and the one after this point is the
return period.

Cash Flow Analysis

Cash flow analysis is the process of comparing projected savings and benefits to the project costs. This is
used to decide whether a system change is beneficial or not. In the cash flow analysis method, projected
expenditure and costs are identified and totaled. The difference between the incoming savings and
benefits' equivalent and the outgoing expenses is the cash flow. This cash flow amount, added for several
months, would give the accumulated cash flow.
A cash flow is a procedure designed to keep track of accumulated savings and expenditure on a regular
basis.
Who should do the CBA?

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