CBA How to calculate

CPF>Cost-Benefit Analysis (CBA)

The analysis to compare costs and benefits to see whether investing in the development of a new system will be beneficial. There are tangible benefits and intangible benefits. There are two main costs; development and production cost.

CPF>Cost-Benefit Analysis (CBA)

Tangible Benefits Intangible Benefits Improved customer good will. Improved employee morale. Better service to the community Better decision making etc Costs Development cost Production cost

Reduce errors. Increase sales. Reduced expenses. Better credit. Reduced credit losses. etc

CPF>Cost-Benefit Analysis (CBA)

Present value is calculated using the following formula. It is one of popular approach to measure the overall benefit of the system
PV = Payment X (1/(1+C)n )
C = discount rate or cost of money. n = number of periods projected.
21 668 = 28 840 X (1/(1+ 0.10)3 )

CPF>CBA>Samples
Estimated Benefits
Estimated Cost Hardware Software Consultant RM50 000 RM 7 500 Inventory Savings RM 1 500 per week

Assumptions
Discount rate Sensitivity factor(cost) Sensitivity factor(benefits) Annual change in production costs Annual change in benefits 10% 1.1 0.9 7% 5%

RM 20 000

Training
Supplies IS Support Maintenance

RM 20 000
RM 2 400 per year RM 18 000 per year RM 2 500 per year

CPF>CBA>Samples
Costs Development Costs Hardware Software Consultant Training Total Production Costs Supplies Nwrk Personnel Maintenance Annual Prod.Costs (Present Value) Accumulated Costs Year 0 55 8 22 22 000 250 000 000 Year 1 Year 2 Year 3 Year 4 Year 5

50 000*1.1 2 400*1.1

(2 640*0.07)+ 2 640

107 250 2 640 19 800 2 750 25 190 22 900 130 150 2 825 21 186 2 943 26 954 22 275 152 425 3 023 22 669 3 148 28 840 21 668 174 093 3 234 24 256 3 369 30 859 21 077 195 170 3 461 25 954 3 605 33 020 20 502 215 672

22 900 = 25 190 X (1/(1+ 0.10)1 )

152 425 = 130 150 + 22 275

CPF>CBA>Samples
1500*52*0.9
Benefits Year 0

(70 200*0.05)+ 70 200

Year 1 70 200
63 818 63 818

Year 2 73 710
60 917 124 735

Year 3 77 396
58 148 182 883

Year 4 81 265
55 505 238 388

Year 5 85 329
52 982 291 370

Reduced inventory costs (Present Value)

Accumulated benefits (Present Value) Gain or Loss Profitability Index 0.71

(66 332)

(27 690)

8790

43 218

75 697

Profitability index = 0.71, showing that it is not good investment because of its index is less than one.
0.71 = 75 697 / 107 250 Gain or Loss / Development Cost