only measure of a project’s worth. Figure 1-10 includes the Of calculation for our example project Determine Break-Even Point Another common approach to measuring a project’s merhew/) is defined as the number of years it takes a firm to recover its original investment in the project from net cash flows. As shown in Figure 1-10, the project’s net cash flows “pay back” the initial investment during the fourth ycar, this is the year in which the cumulative cash flow ligure becomes positive. Dividing the differ ence between that year’s cash flow and its cumulative cash flow by that year’s cash flow determines how far into the year the break-even will occur. See Appendix IA for the break-even calculation The break-even point is casy to calculate and understand and does give an indication of a project’s liquidity or the speed at which the project will gencrate cash returns. Also, projects that produce higher returns early in the project’s life are thought to be less risky, since we can anticipate near-term events with more accu- racy than we can long-term events. The break-even point does ignore cash flows that occur after the break-even point has been reached and therefore is based against long-term projects. Determine Net Present Value The sinuple cash flow method, return on investment, and break-even point, as shown in Figure 1-10, all share the weakness of not recog. nizing the time value of money. In these analyses, the timing of cash flows is ignored. A dollar in ycar 3 of the project is considered equal to a dollar in year 1. Nel present walue (NPV) is used to compare the present value of all cash inflows and outflows for the project in today’s dollar terms. The key to understand- ing present values is to recognize that if you had a dollar today, you could invest it and recive some rate of return on your investment. Therefore, a dollar received in the future is worth less than a dollar received today, since you forgo that potential return. Appendix 1A shows the present value of a dollar received in the future for different numbers of years and rates of return. If you have a friend who owes you a dollar today, but instead gives you that dollar in three years–you’ve been had! Given a 10% rate of return on an investment, you’ll be receiving the equivalent of 75 cents in today’s terms. The basic formula to convert a future cash flow to its present value is shown in Appendix 1A. In Figure 1-11, the present value of the costs and benefits has been calculated and added to our example spreadsheet, using a 6% rate of return. The NPV is simply the difference between the total present value of the benefits and the total present value of the costs. As long as the NPV is greater than zero, the project is considered economically feasible. Organizational Feasibility The final technique used for feasibility analysis is to assess the organizational feasibility of the system: how well the system ultimately will be accepted by its users and incorporated into the ongoing operations of the organization. There are many organizational factors that can have an impact on the project, and scasoned developers know that organizational feasibility can be the most difficult feasibility dimension to assess. In essence, an organizational feasibility analysis attempts to answer the question “If we build it, will they come?”

Assign Values to Costs and Benefits Once the types of costs and benefits have been identifiest, you will need to assign specific dollar values to them. This may seem impossible– How can someone quantify costs and benefits that haven’t happened yet? And how can those predictions be realistic? Although this task is very difficult, you have to do the best you can to come up with reasonable numbers for all of the costs and benefits. Only then can the approval committee make an educated deci- sion about whether or not to move ahead with the project. The most effective strategy for estimating costs and benefits is to rely on the people who have the best understanding of them. For example, costs and benefits that are related to the technology or the project itself can be provided by the com- pany’s IT group or external consultants, and business users can develop the numbers associated with the business (c.g., sales projections, order levels). The company also can consider past projects, industry reports and vendor information, although these sources probably will be a bit loss accurate. Likely, all of the estimates will be revised as the project proceeds. If predicting a specific value for a cost or benefit is proving difficult, it may be useful to estimate a range of values for the cost or benefit and then assign a like- lihood (probability) estimate to each value. With this information, an expected value for the cost or benefit can be calculated. Recall the calculations shown in Figure 1-6 in which the Tane Source marketing staff developed expected values for projected sales. As more information is learned during the project, the value esti- mates and the probability estimates can be revised, resulting in a revised expected value for the cost or benefit. What about the intangible costs and benefits? Sometimes, it is acceptable to list intangible benefits, such as improved customer service, without assigning a dollar value. Other times, estimates have to be made regarding how much an intangible benefit is worth.” We suggest that you quantify intangible costs or benefits if at ali possible. If you do not, how will you know if they have been realized? Suppose that a system claims to improve customer service. This benefit is intangible, but let’s assume that the improvement in customer service will decrease the number of cus- tomer complaints by 10% cach year over three years and that $200.000 is currently spent on phone charges and phone operators who handle complaint calls. Suddenly, we have some very tangible numbers with which to set goals and measure the orig. inally intangible benefit Figure 1-10 shows costs and benefits along with assigned dollar values. In this example, for simplicity, all development costs are assumed to occur in the current year 2009, and all benefits and operational costs are assumed to begin when the system is implemented at the start of 2010, and continue through 2013. Notice that the customer service intangible benefit has been quantified, based on a decrease in cus- tomer complaint phone calls. The intangible benefit of being able to offer services that competitors currently offer was not quantified, but it was listed so that the approval committee will consider the benefit when assessing the system’s economic feasibility. Determine Cash Flow A formal cost-benefit analysis usually contains costs and benefits over a selected number of years (usually, three to five years) to show cash flow over time. (See Figure 1-10.) With this cash flow method, the years are listed across the top of the spreadsheet to represent the period for analysis, and numeric. values are entered in the appropriate cells within the spreadsheet’s body. Some- times, fixed amounts are entered into the columns. For example, Figure 1-10 lists