Skip to main content

CBA - cost benefit analysis

 In simple words, CBA is an analysis to determine the cost to start, run, and maintain a project (or any other initiative) and the benefits received over a certain period. By performing CBA, we compare all the anticipated benefits with all the associated costs of the project.

Why Conduct Cost Benefit Analysis?

  • To make informed decisions before starting a project or selecting one among multiple options.

  • To set the right goals for a project.

  • To define success criteria by identifying quantifiable results—what to measure and how to measure.

  • To estimate project costs and identify required resources.

Important Considerations

Often, assumptions are made about project benefits without defining how they will be realized and measured. Quantifying returns/benefits is the only way to ensure they are achieved later. A famous saying states, "If you cannot measure something, you cannot make it." Many projects start due to market trends, where everyone repeats a few benefits, leading to projects being undertaken without clear objectives.

Key Considerations for IT Projects

Costs

Development Costs

For software development projects, consider:

  • Feasibility or due diligence costs

  • Estimated costs for Requirement Analysis (RA), Design, Coding, Testing, and Deployment (developer costs or salaries)

  • Training costs

  • Tools, IDEs, and other development necessities

  • Equipment costs

Operational Costs

  • Installation costs

  • Maintenance costs

  • Personnel costs

  • Equipment costs

  • Site upgrades

  • End-user training costs

Non-Recurring Costs

  • Capital costs

  • Data Processing Equipment (Desktops, Laptops, Servers, Networking Equipment)

  • Software (Applications, Operating Systems, Databases)

  • Other one-time costs (Infrastructure, Salaries & Compensation, Contracting, Studies, Data Preparation, Travel, Training, Overheads, Parallel System Run Costs)

Recurring Costs

  • Rent and infrastructure expenditures

  • Salaries and compensations (recurring type)

  • Contracting costs

  • Data Collection

  • Software upgrades

  • System maintenance and support

  • Travel

  • Training

  • Supplies

  • Other recurring expenses

Intangible Costs

  • Productivity loss

  • Management overhead

Benefits

Direct Benefits (Tangible)

Direct benefits impact a business’s bottom line and are easily measurable:

  • Reduced effort/manpower

  • Reduced non-labor costs

  • Better and/or more services to internal or external customers (new business opportunities)

  • Operational efficiency improvements

  • Cost savings from business process improvements

  • Service cost reduction

Indirect Benefits (Intangible)

Indirect benefits are harder to measure but positively impact an organization. These include:

  • Improved decision-making

  • Better risk management

  • Enhanced employee satisfaction

  • Strengthened customer relationships

Measuring and quantifying indirect benefits is essential. If a project’s CBA shows a higher contribution of indirect benefits than direct ones, it may indicate future risks and ambiguity. If direct benefits are hard to show at the beginning, achieving and quantifying them later can be even more difficult, leading to a high-claim, no-gain scenario.

Analysis Approach

Total Cost Calculation

Summing recurring and non-recurring costs for each year of the system’s life to estimate the total cost.

Total Benefits Calculation

Adding up all identified benefits to determine total anticipated benefits.

Cumulative Benefits Calculation

Adding all benefits received each year (cash inflows) and calculating cumulative benefits at the end of each year.

Net Benefits / Net Cash Flow Calculation

Subtracting total costs from total benefits for each year to determine net benefits.

Net Present Value (NPV) Calculation

NPV (for a period of N) = - Initial investment

Where:

  • R = Net cash flow at the end of each period

  • i = Required rate of return per period (organization-defined discount rate)

  • N = Number of periods generating cash inflows

A common method to choose the discount rate (i) is to determine the return the funds could generate if invested in a different financial instrument.

Internal Rate of Return (IRR) Calculation

IRR helps compare the profitability of two projects. It is the discount rate at which NPV equals zero.

  • If comparing two projects, the one with the higher IRR is generally the better investment.

By following this structured approach, organizations can make informed decisions, ensure project feasibility, and maximize returns on investment.

Comments

Post a Comment

Popular posts from this blog

Virtual environments in python

 Creating virtual environments is essential for isolating dependencies and ensuring consistency across different projects. Here are the main methods and tools available, along with their pros, cons, and recommendations : 1. venv (Built-in Python Virtual Environment) Overview: venv is a lightweight virtual environment module included in Python (since Python 3.3). It allows you to create isolated environments without additional dependencies. How to Use: python -m venv myenv source myenv/bin/activate # On macOS/Linux myenv\Scripts\activate # On Windows Pros: ✅ Built-in – No need to install anything extra. ✅ Lightweight – Minimal overhead compared to other tools. ✅ Works across all platforms . ✅ Good for simple projects . Cons: ❌ No dependency management – You still need pip and requirements.txt . ❌ Not as feature-rich as other tools . ❌ No package isolation per project directory (requires manual activation). Recommendation: Use venv if you need a simple, lightweight solut...
Post a Comment
Read more

Building a Simple Text Generator: A Hands-on Introduction

Introduction Text generation is one of the most exciting applications of Natural Language Processing (NLP) . From autocorrect and chatbots to AI-generated stories and news articles , text generation models help machines produce human-like text. In this blog post, we’ll introduce a simple yet effective text generation method using Markov Chains . Unlike deep learning models like GPT, this approach doesn’t require complex neural networks—it relies on probability-based word transitions to create text. We’ll walk through: ✅ The concept of Markov Chains and how they apply to text generation. ✅ A step-by-step implementation , fetching Wikipedia text and training a basic text generator. ✅ Example outputs and future improvements. The Concept of Markov Chains in Text Generation A Markov Chain is a probabilistic model that predicts future states (or words) based only on the current state (or word), rather than the full sentence history. How it works in text generation: 1️⃣ We analyze a gi...
Post a Comment
Read more

Mastering Trade-Off Analysis in System Architecture: A Strategic Guide for Architects

 In system architecture and design, balancing conflicting system qualities is both an art and a science. Trade-off analysis is a strategic evaluation process that enables architects to make informed decisions that align with business goals and technical constraints. By prioritizing essential system attributes while acknowledging inevitable compromises, architects can craft resilient and efficient solutions. This enhanced guide provides actionable insights and recommendations for architects aiming to master trade-off analysis for impactful architectural decisions. 1. Understanding Trade-Off Analysis Trade-off analysis involves identifying and evaluating the conflicting requirements and design decisions within a system. Architects must balance critical aspects like performance, scalability, cost, security, and maintainability. Since no system can be optimized for every quality simultaneously, prioritization based on project goals is essential. Actionable Insights: Define key quality ...
Post a Comment
Read more