Feasibility Studies

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Feasibility Studies

• ACCA Lecture 1e

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Feasibility Studies

• The feasibility study
• Key areas of feasibility
• Investment appraisal techniques
• The feasibility study report

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Feasibility Studies The Feasibility Study

• The feasibility study
• A feasibility study is a formal study to decide
  what type of system can be developed which best
  meets the needs of the organisation
• The feasibility study team
• Departments affected
• Detailed knowledge of computers and systems design

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Feasibility Studies The Feasibility Study

• Detailed knowledge of the organisation
• Information needs
• Improvements
• Consultants
• Lack of knowledge about the organisation
• Suitable personal qualities
• Objectively critical
• All members should have knowledge of information
  technology design systems

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Feasibility Studies The Feasibility Study

• Larger projects professional systems analyst
• Identifying and selecting IS projects
• A planned approach is needed
• IT Strategy, core part of overall corporate
  strategy
• Context of overall business needs
• Representation at senior management level
• Separate departmental or function status
• Funding must be considered

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Feasibility Studies The Feasibility Study

• A strategic plan for the use of IT
• Steering committee to oversee systems development
• Approach traditional life cycle, methodology
• Procedures for evaluating and monitoring
  performance
• Systems development procedures must be agreed
• Feasibility studies, cost-benefits, design specs

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Feasibility Studies The Feasibility Study

• Tools and techniques, reporting
• Invitations to tender
• Supplier conditions
• Testing and implementation
• Conducting the feasibility study
• Similar to work performed later on in the
  development

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Feasibility Studies The Feasibility Study

• A feasibility study should be carried out
  because
• Complicated and costly
• Disrupted operations
• Have far reaching consequences
• Impact on organisation strategy and structure

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Feasibility Studies The Feasibility Study

• Terms of reference
• Set out by a steering committee, the information
  director or the board of directors, might consist
  of
• Investigate and report on existing system
• Define the system requirements
• Establish whether existing system meets
  requirements
• Establish whether, could be met by an alternative
  system
• Specify performance criteria
• Recommend the most suitable system
• Detailed cost budget

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Feasibility Studies The Feasibility Study

• Terms of reference
• Set out by a steering committee, the information
  director or the board of directors, might consist
  of
• Investigate and report on existing system
• Define the system requirements
• Establish whether existing system meets
  requirements
• Establish whether, could be met by an alternative
  system
• Specify performance criteria
• Recommend the most suitable system
• Detailed cost budget
• Prepare a draft plan
• Establish whether benefits could be realised
• Budget and compare budgets
• Set a report back date

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Feasibility Studies The Feasibility Study

• The Problem/requirements list
• Input
• Output
• Processing
• Growth, future volumes
• Control
• Staffing and structure
• Operational costs
• Type of system
• Response times
• Organisational problems

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Feasibility Studies The Feasibility Study

• Option evaluation
• Number of options
• Feasibility study report
• Step 1.
• Create the base constraints, which any system
  should satisfy
• Operations
• Information output
• Volume of processing
• General system requirements
• Compatibility/integration

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Feasibility Studies The Feasibility Study

• Step 2.
• Project options
• Step 3.
• Assess the impact
• Step 4.
• Review
• System Justification
• A new system should not be recommended unless it
  can be justified
• Cost and benefits Performance Criteria

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Feasibility Studies Key Areas of Feasibility

• Key Areas of Feasibility
• Technical feasibility
• Operational feasibility
• Social feasibility
• Economic feasibility
• Technical feasibility
• Must be technically achievable
• Volume
• Capacity
• Response time
• Number of users

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Feasibility Studies Key Areas of Feasibility

• Operational feasibility
• Conflicts with the way the organisation does
  business
• Not feasible
• Social feasibility
• Personnel
• Job specification
• Industrial relation
• Skills requirements
• Motivation

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Feasibility Studies Key Areas of Feasibility

• Economic feasibility
• Benefits must justify costs
• Best option
• Complete with projects in other areas of the
  business
• The costs of a proposed system
• Vendor
• Organisations own employees
• Costs of a new system

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Feasibility Studies Key Areas of Feasibility
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Feasibility Studies Key Areas of Feasibility
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Feasibility Studies Key Areas of Feasibility

• Capital and revenue costs
• Cash flows and DCF
• Annual charge against profits
• Stakeholders
• Capital Items
• Accounting treatment, may vary widely

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Feasibility Studies Key Areas of Feasibility

• The benefits of a proposed system
• Savings because the old system will no longer
• Staff costs
• Other operating costs
• Extra savings
• Improvements or enhancements
• More sales revenue
• Better stock control
• Fewer stock losses, obsolescence and
  deterioration
• Further savings in staff time

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Feasibility Studies Key Areas of Feasibility

• One off revenue benefits
• Sale of equipment
• Less office space
• Benefits might be intangible
• Customer satisfaction
• Staff morale
• Better decision making

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Feasibility Studies Investment Appraisal
Techniques

• Investment Appraisal Techniques
• Cost-benefit analysis
• Many system cost elements are poorly defined
• Three principal methods, economic viability of a
  project

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Feasibility Studies Investment Appraisal
Techniques

• Variations in the estimates might affect their
  decisions

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Feasibility Studies Investment Appraisal
Techniques

• The Payback Period
• is the length of time required before the total
  cash inflows received from the project is equal
  to the original cash outlay. In other words, it
  is the length of time the investment takes to pay
  itself back.

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Feasibility Studies Investment Appraisal
Techniques

• Example Payback PeriodThe payback method has
  obvious disadvantages. Consider the case of two
  projects for which the following information is
  available.

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Feasibility Studies Investment Appraisal
Techniques

• Example Payback PeriodThe payback method has
  obvious disadvantages. Consider the case of two
  projects for which the following information is
  available.

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Feasibility Studies Investment Appraisal
Techniques

• Example Payback PeriodThe payback method has
  obvious disadvantages. Consider the case of two
  projects for which the following information is
  available.

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Feasibility Studies Investment Appraisal
Techniques

• Accounting Rate or Return
• ARR Estimated average profits x 100
• Estimated average investment
• Example ARRCaddick Limited is contemplating a
  computerisation project and has two different
  alternatives. Based on the ARR method which of
  the two projects would be recommended

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Feasibility Studies Investment Appraisal
Techniques

• Accounting Rate or Return
• ARR Estimated average profits x 100
• Estimated average investment
• Example ARRCaddick Limited is contemplating a
  computerisation project and has two different
  alternatives. Based on the ARR method which of
  the two projects would be recommended

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Feasibility Studies Investment Appraisal
Techniques

• Accounting Rate or Return
• ARR Estimated average profits x 100
• Estimated average investment
• Example ARRCaddick Limited is contemplating a
  computerisation project and has two different
  alternatives. Based on the ARR method which of
  the two projects would be recommended

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Feasibility Studies Investment Appraisal
Techniques

• Advantages
• Readily available accounting data
• Widely understood
• Shortcomings
• Timing of cash flows

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Feasibility Studies Investment Appraisal
Techniques

• Discounted Cash FlowDCF is a technique of
  evaluating capital investment projects, using
  discounting arithmetic to determine whether or
  not they will provide a satisfactory return.
• Capital for fixed assets at the Start
• Profits coming in from investments over a number
  of years
• Systems go live, running costs

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Feasibility Studies Investment Appraisal
Techniques

• DCF is a time value or interest cost and risk
• Only relevant costs are recognised

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Feasibility Studies Investment Appraisal
Techniques

• DCF is a time value or interest cost and risk
• Only relevant costs are recognised

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Feasibility Studies Investment Appraisal
Techniques

• DCF is a time value or interest cost and risk
• Only relevant costs are recognised

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Feasibility Studies Investment Appraisal
Techniques

• Internal Rate of Return
• Calculating the Rate of Return
• Comparing cost of capital
• Higher rate of return than the cost of capital,
  NPV would be positive
• Lower rate of return than the cost of capital,
  NPV would be negative
• Method of calculation
• Messy and unsatisfactory
• Spreedsheet

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Feasibility Studies Investment Appraisal
Techniques

• The Feasibility Study Report
• Terms of reference
• Existing system
• System Requirements
• Proposed Systems
• Cost/Benefit analysis
• Development and implementation plans
• Recommendations