IT Project Cost-Benefit Analysis

Published: June 30th, 2009

Assuming you got through the rough stuff of defining costs andbenefits, the analysis should be simple. What you want to know is ifthe benefits of the project will exceed the costs, and by how much.Since costs and benefits may be spread over long periods of time,Present Values of these amounts are also usually calculated to comparethe amounts in “today’s” dollars.

When I did my first Cost-Benefit Analysis for a major project, I hadto work with an spreadsheet expert to to do these calculations; now youcan probably download something for free or a nominal fee that will dobasic and advanced calculations. The key things these tools need is thetwo dollar values, cost and benefit, and the length of time of theanalysis. The latter is usually defined by accounting standards at yourcompany, and the most popular time periods used are three years andfive years, often based around your company’s depreciationprocedures/periods.

Given that, you can usually get calculations like:
•    Break-Even Point, the point in time when the benefits realized exceed the project cost
•    Various rate of return and yield values, like IRR.

These calculations may be used to determine if a project passes afunding hurdle; its not enough that a project makes money, but it hasto make more than investing the equivalent dollars of the project costin securities or other investments.

After all this is done, a project can now proceed into the gatingprocess to see if it has enough expected value to warrant its beinginitiated and carried out. Of course, if your analysis has determinedalready that the project does not have positive return or does notsurpass the hurdle rate, you can stop now and move onto the nextproject idea. Determining that a project is not good for the businessis just as valuable as finding those projects that are good for thebusiness. Resources should not be wasted.

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