Techno International New Town

Software Engineering Part - IB Prof. A K. SAHA

Feasibility Analysis
 Feasibility is defined as the practical extent to which a project can
be performed successfully.
 To evaluate feasibility, a feasibility study is performed, which
determines whether the solution considered to accomplish the
requirements is practical and workable in the software.
 Information such as resource availability, cost estimation for
software development, benefits of the software to the organization
after it is developed and cost to be incurred on its maintenance are
considered during the feasibility study.

Objective
 The objective of the feasibility study is to establish the reasons for
developing the software that is acceptable to users, adaptable to
change and conformable to established standards.
 To analyze whether the software will meet organizational
requirements.
 To determine whether the software can be implemented using the
current technology and within the specified budget and schedule.
 To determine whether the software can be integrated with other
existing software.

Types of Feasibility
Various types of feasibility that are commonly considered include
technical feasibility, operational feasibility, and economic feasibility.

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 Techno International New Town
Software Engineering Part - IB Prof. A K. SAHA

Technical Feasibility
 Analyzes the technical skills and capabilities of the software
development team members.
 Determines whether the relevant technology is stable and
established.
 Ascertains that the technology chosen for software development
has a large number of users so that they can be consulted when
problems arise or improvements are required.

Operational Feasibility
 Determines whether the problems anticipated in user requirements
are of high priority.
 Determines whether the solution suggested by the software
development team is acceptable.
 Analyzes whether users will adapt to a new software.
 Determines whether the organization is satisfied by the alternative
solutions proposed by the software development team.

Economic Feasibility
 Cost incurred on software development to produce long-term gains
for an organization.
 Cost required to conduct full software investigation (such as
requirements elicitation and requirements analysis).
 Cost of hardware, software, development team, and training.

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 Techno International New Town
Software Engineering Part - IB Prof. A K. SAHA

Legal Feasibility

In Legal Feasibility study project is analyzed in legality point of view.

This includes analyzing barriers of legal implementation of project, data
protection acts or social media laws, project certificate, license,
copyright etc. Overall it can be said that Legal Feasibility Study is study
to know if proposed project conform legal and ethical requirements.

Schedule Feasibility
In Schedule Feasibility Study mainly timelines/deadlines is analyzed for
proposed project which includes how many times teams will take to
complete final project which has a great impact on the organization as
purpose of project may fail if it can’t be completed on time.

Feasibility Study Process

 Information assessment: Identifies information about whether the
system helps in achieving the objectives of the organization. It also
verifies that the system can be implemented using new technology
and within the budget and whether the system can be integrated
with the existing system.
 Information collection: Specifies the sources from where
information about software can be obtained. Generally, these
sources include users (who will operate the software), organization
(where the software will be used), and the software development
team (which understands user requirements and knows how to
fulfill them in software).
 Report writing: Uses a feasibility report, which is the conclusion
of the feasibility study by the software development team. It
includes the recommendations whether the software development
should continue. This report may also include information about
changes in the software scope, budget, and schedule and
suggestions of any requirements in the system.

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 Techno International New Town
Software Engineering Part - IB Prof. A K. SAHA

 General information: Describes the purpose and scope of

feasibility study. It also describes system overview, project
references, acronyms and abbreviations, and points of contact to be
used. System overview provides description about the name of the
organization responsible for the software development, system
name or title, system category, operational status, and so on.
Project references provide a list of the references used to prepare
this document such as documents relating to the project or
previously developed documents that are related to the project.
Acronyms and abbreviations provide a list of the terms that are
used in this document along with their meanings. Points of
contact provide a list of points of organizational contact with users
for information and coordination. For example, users require
assistance to solve problems (such as troubleshooting) and collect
information such as contact number, e-mail address, and so on.

Management summary: Provides the following information.

• Environment: Identifies the individuals responsible for software
development. It provides information about input and output
requirements, processing requirements of the software and the
interaction of the software with other software. It also identifies system
security requirements and the system's processing requirements

• Current functional procedures: Describes the current functional

procedures of the existing system, whether automated or manual. It also
includes the data-flow of the current system and the number of team
members required to operate and maintain the software.

• Functional objective: Provides information about functions of the

system such as new services, increased capacity, and so on.

• Performance objective: Provides information about performance

objectives such as reduced staff and equipment costs, increased
processing speeds of software, and improved controls.

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 Techno International New Town
Software Engineering Part - IB Prof. A K. SAHA

• Assumptions and constraints: Provides information about

assumptions and constraints such as operational life of the proposed
software, financial constraints, changing hardware, software and
operating environment, and availability of information and sources.

• Methodology: Describes the methods that are applied to evaluate the

proposed software in order to reach a feasible alternative. These methods
include survey, modeling, benchmarking, etc.

• Evaluation criteria: Identifies criteria such as cost, priority,

development time, and ease of system use, which are applicable for the
development process to determine the most suitable system option.

• Recommendation: Describes a recommendation for the proposed

system. This includes the delays and acceptable risks.

• Proposed software: Describes the overall concept of the system as

well as the procedure to be used to meet user requirements. In addition,
it provides information about improvements, time and resource costs,
and impacts. Improvements are performed to enhance the functionality
and performance of the existing software. Time and resource costs
include the costs associated with software development from its
requirements to its maintenance and staff training. Impacts describe the
possibility of future happenings and include various types of impacts as
listed below.

• Equipment impacts: Determine new equipment requirements and

changes to be made in the currently available equipment requirements.

• Software impacts: Specify any additions or modifications required in

the existing software and supporting software to adapt to the proposed
software.

• Organizational impacts: Describe any changes in organization, staff

and skills requirement.

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 Techno International New Town
Software Engineering Part - IB Prof. A K. SAHA

• Operational impacts: Describe effects on operations such as user-

operating procedures, data processing, data entry procedures, and so on.

 Developmental impacts: Specify developmental impacts such as

resources required to develop databases, resources required to
develop and test the software, and specific activities to be
performed by users during software development.

• Security impacts: Describe security factors that may influence the

development, design, and continued operation of the proposed software.

• Alternative systems: Provide description of alternative systems,

which are considered in a feasibility study. This also describes the
reasons for choosing a particular alternative system to develop the
proposed software and the reason for rejecting alternative systems.

What is a cost benefit analysis?

Cost Benefit Analysis (CBA) refers to a mathematical approach that
helps in the comparison of the cost and expected benefits of two or more
options or projects. Therefore, it helps an individual or an organization
to determine which potential decision can make the most financial sense
when it comes to investment. Also, it identifies the benefits associated
with a particular investment and the involved costs and deducting the
costs from the benefits. It is applied in various institutions such as
software development, construction, education, healthcare, among other
businesses.

The relationship between Cost Benefit Analysis and Net

Present Value
Well, before you engage in any kind of project, or buying a property, it
is always recommended that you weight the expected costs against the
benefits. This will help you reach an informed and rational decision. In
most cases, CBA is often done for long-term goals. However, because of

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 Techno International New Town
Software Engineering Part - IB Prof. A K. SAHA

the fluctuations, inflations, and other changing factors in the

market, it’s always good to know the net present value. Net present
value in economic terms refers to a method whereby future benefits or
costs are calculated based on the present values. Therefore, if the net
present is positive, then that is an indication that the decision is good for
investment since benefits overshadow costs. Nonetheless, if the result is
negative, then the investment decision shouldn’t be recommended.

How to calculate Cost Benefit Analysis

Most companies do look for ways to make their investment returns
positive. For this reason, they do try as much as they can to minimize
their risks by conducting an exhaustive CBA. However, while some find
it a long and tedious process, other individuals/companies simply don’t
know where to start. Therefore, if you are such an
individual/organization, know that you are in the right place. The
following is a step by step guide on how you can calculate CBA for your
business entity.

Step 1: Identify costs

First and foremost, you should compile a comprehensive list of all the
expenses that are associated with your planned investment or action.
Remember, costs are categorized into different varieties i.e., direct
costs, indirect costs, tangible costs, intangible costs, and real costs.

Direct costs– these are costs that are directly associated with the
production of the project or investment.

Indirect costs– are costs that are not directly accounted for the
investment. They are either fixed or variable.

Tangible costs– are costs associated with an identifiable source or

asset. They include rents, payrolls, among others.

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 Techno International New Town
Software Engineering Part - IB Prof. A K. SAHA

Intangible costs– these costs are difficult to identify and fluctuates

with consumer demands.

Real cost– these are costs that are involved in the actual production
process, such as labor costs and raw materials.

Step 2: Identify Benefits

Once you’ve compiled a comprehensive list of all the costs incurred in
the project/investment, you need to embark on identifying and
quantifying all benefits anticipated should the investment/project be
implemented. First, identify the monetary benefits such as profits
from products and services, the contribution from investors,
reduction in production, among others.

Also, you need to identify some of the nonmonetary benefits that are
likely to arise. These include reliability, increased durability, improved
customer satisfaction, etc.

Step 3: Evaluate costs and Benefits

This is the final step of cost-benefit analysis. Here, you can take all the
benefits as well as the sum of the costs and put them in a b/c equation. If
the sum of costs is greater than the total benefits, this is an
indication that the project/investment is not worth undertaking.
However, if the total costs and benefits are more or less equal, then
it’s recommended that you re-evaluate the CBA. In many a time, such
cases do arise due to errors or incorrect calculations. If the sum of the
benefits is higher than the sum of the cost incurred, then that’s an
indication that the project/investment is potentially worthwhile.

Sample of Cost-Benefit Analysis

‘Good Health’ is a startup hospital that has been in operation for close to
two years now. The manager, however, plans to expand its operations in

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 Techno International New Town
Software Engineering Part - IB Prof. A K. SAHA

the third working year. The hospital management decides to run a cost-
benefit analysis to determine whether or not the decision is beneficial or
feasible.

The management analyzes a time horizon of one year and estimates that
the total revenue collected will amount to 200,000. However, this will be
possible if 2 more physicians are hired and more hospital equipment
worth 100,000 bought. The salary of the physicians will be 70,000, and
the cost of hiring and training will be 5,000.

Therefore, when calculating the CBA, we first get the total costs by
adding all the costs.

In this case, it will be salaries + equipment+ cost of hiring and training

= 100,000+ 70,000+ 5,000

= 175,000

Additionally, there is the cost of expanding consultation rooms which

stands at 10,000.

On the other hand, the benefits that will come after the implementation
of the plan will be 200,000. Therefore, using the benefit-cost ration, we
get 175,000/200,000= 0.875. Given that the value is positive and that the
total benefits are greater than the costs, the CBA indicates that the
decision to expand the hospital’s operation is feasible and beneficial to
the company.

Payback Method
 An investment project is accepted or rejected on the basis of
payback period. Payback period means the period of time that a
project requires to recover the money invested in it. It is mostly
expressed in years.

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 Techno International New Town
Software Engineering Part - IB Prof. A K. SAHA

 Unlike net present value and internal rate of return method,

payback method does not take into account the time value of
money.

Payback period formula – even cash flow

When net annual cash inflow is even (i.e., same cash flow every period),
the payback period of the project can be computed by applying the
simple formula given below:

Payback Period = Investment Required/Net Annual Cash Inflow *

*The denominator of the formula becomes incremental cash flow if an

old asset (e.g., machine or equipment) is replaced by a new one.

Example 1:
The Delta company is planning to purchase a machine known as
machine X. Machine X would cost 25,000 and would have a useful life
of 10 years with zero salvage value. The expected annual cash inflow of
the machine is 10,000.

Required: Compute payback period of machine X and conclude

whether or not the machine would be purchased if the maximum desired
payback period of Delta Company is 3 years.

Solution:

Since the annual cash inflow is even in this project, we can simply
divide the initial investment by the annual cash inflow to compute the
payback period. It is shown below:

Payback period = 25,000/10,000 = 2.5 years

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 Techno International New Town
Software Engineering Part - IB Prof. A K. SAHA

According to payback period analysis, the purchase of machine X is

desirable because its payback period is 2.5 years which is shorter than
the maximum payback period of the company.

Example 2:
Due to increased demand, the management of X Company is considering
to purchase a new equipment to increase the production and revenues.
The useful life of the equipment is 10 years and the company’s
maximum desired payback period is 4 years. The inflow and outflow of
cash associated with the new equipment is given below:

Initial cost of equipment: 37,500

Annual cash inflows:

Sales: 75,000

Annual cash Outflows:

Cost of ingredients: 45,000

Salaries expenses: 13,500

Maintenance expenses: 1,500

Non-cash expenses:

Depreciation expense: 5,000

Required: Should Company purchase the new equipment? Use payback

method.

Solution:

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 Techno International New Town
Software Engineering Part - IB Prof. A K. SAHA

Step 1: In order to compute the payback period of the equipment, we

need to work out the net annual cash inflow by deducting the total of
cash outflow from the total of cash inflow associated with the
equipment.

Computation of net annual cash inflow:

75,000 – (45,000 + 13,500 + 1,500) = 15,000

Step 2: Now, the amount of investment required to purchase the

equipment would be divided by the amount of net annual cash inflow
(computed in step 1) to find the payback period of the equipment.

= 37,500/15,000 =2.5 years

Depreciation is a non-cash expense and has therefore been ignored

while calculating the payback period of the project.

According to payback method, the equipment should be purchased

because the payback period of the equipment is 2.5 years which is
shorter than the maximum desired payback period of 4 years.

Payback method with uneven cash flow:

In the above examples we have assumed that the projects generate even
cash inflow but many projects usually generate uneven cash flow. When
projects generate inconsistent or uneven cash inflow (different cash
inflow in different periods), the simple formula given above cannot be
used to compute payback period. In such situations, we need to compute
the cumulative cash inflow and then apply the following formula:

Payback Period = Years before Full Recovery + (Unrecovered Cost at

start of the year / Cash Flow during the year)

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 Techno International New Town
Software Engineering Part - IB Prof. A K. SAHA

Example 3:
An investment of 200,000 is expected to generate the following cash
inflows in six years:

Year 1: 70,000
Year 2: 60,000
Year 3: 55,000
Year 4: 40,000
Year 5: 30,000
Year 6: 25,000

Required: Compute payback period of the investment. Should the

investment be made if management wants to recover the initial
investment in 3 years or less?

Solution:
(1). Because the cash inflow is uneven, the payback period formula
cannot be used to compute the payback period. We can compute the
payback period by computing the cumulative net cash flow as follows:
Initial Investment = 200,000
Year Cash In Flow Cumulative Cash In Flow
1 70,000 70,000
2 60,000 130,000
3 55,000 185,000
4 40,000 225,000
5 30,000 255,000
6 25,000 280,000

Payback period = 3 + (15,000*/40,000)

= 3 + 0.375
= 3.375 Years

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 Techno International New Town
Software Engineering Part - IB Prof. A K. SAHA

*Unrecovered investment at start of 4th year:

= Initial cost – Cumulative cash inflow at the end of 3rd year
= 200,000 – 185,000
= 15,000

The payback period for this project is 3.375 years which is longer than
the maximum desired payback period of the management (3 years). The
investment in this project is therefore not desirable.

Advantages and disadvantages of payback method

Advantages:
1. An investment project with a short payback period promises the
quick inflow of cash. It is therefore, a useful capital budgeting
method for cash poor firms.
2. A project with short payback period can improve the liquidity
position of the business quickly. The payback period is important
for the firms for which liquidity is very important.
3. An investment with short payback period makes the funds
available soon to invest in another project.
4. A short payback period reduces the risk of loss caused by changing
economic conditions and other unavoidable reasons.
5. Payback period is very easy to compute.

Disadvantages:
6. The payback method does not take into account the time value of
money.
7. It does not consider the useful life of the assets and inflow of cash
after payback period. For example, If two projects, project A and
project B require an initial investment of 5,000. Project A
generates an annual cash inflow of 1,000 for 5 years whereas
project B generates a cash inflow of 1,000 for 7 years. It is clear

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 Techno International New Town
Software Engineering Part - IB Prof. A K. SAHA

that the project B is more profitable than project A. But according

to payback method, both the projects are equally desirable because
both have a payback period of 5 years (5,000/1,000).

Discounted payback method

Capital budgeting is a financial measure which is used to measure the
profitability of a project based upon the inflows and outflows of cash for
that project. Under this method, all cash flows related to the project are
discounted to their present values using a certain discount rate set by the
management.

The discounted payback method takes into account the time value of
money and is therefore an upgraded version of the Simple Payback
Period method. Companies use this method to assess the potential
benefit of undertaking a particular business project.

The discounted payback method tells companies about the time period in
which the initially invested funds to start a project would be recovered
by the discounted value of total cash inflow. Additionally, it indicates
towards the potential profitability of a certain business venture. For
example, if a project indicates that the funds or initial investment will
never be recovered by the discounted value of related cash inflow, it
means the project would not be profitable and the company should
refrain from investing in it.

The following example illustrates how a discounted payback method

differs from a traditional or simple payback method.

Example
An opportunity arises for a company which requires an initial
investment of 800,000 now. The management’s discount rate is 12%.

The amount of cash inflows expected from the new opportunity are:

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 Techno International New Town
Software Engineering Part - IB Prof. A K. SAHA

 Year-1 cash Inflow: 250,000

 Year-2 cash Inflow: 400,000
 Year-3 cash Inflow: 300,000
 Year-4 cash Inflow: 450,000

Required: Compute the simple and discounted payback periods of the

new investment opportunity. Is this investment opportunity acceptable
under two methods if the maximum desired payback period of the
management is 3 years?

Solution
1. Simple payback period
The simple payback method does not take into account the present
value of cash flows. Initial Investment = 800,000
Year Cash In Flow Cumulative Cash In Flow
1 250,000 250,000
2 400,000 650,000
3 300,000 950,000
4 450,000 1,400,000

Simple payback period = Years before full recovery + (Unrecovered cost

at start of the year/Cash flow during the year)

= 2 + *150,000/300,000 = 2.5 years

*800,000 – 650,000

We see that in year 3, the investment is not just recovered but the
remaining cash inflow is surplus. The initial investment of the company
would be recovered in 2.5 years. So the project is acceptable according
to simple payback period method because the recovery period under this
method (2.5 years) is less than the maximum desired payback period of
the management (3 years).

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 Techno International New Town
Software Engineering Part - IB Prof. A K. SAHA

2. Discounted payback period

The discounted payback method takes into account the present value of
cash flows.

Initial Investment = 800,000

Year Cash in Present Value Present Value of Cumulative Cash

Flow factor (12%) Cash in Flow in Flow
1 250,000 *0.893 223,250 223,250
2 400,000 0.797 318,800 542,050
3 300,000 0.712 213,600 755,650
4 450,000 0.636 286,200 1,041,850
Discount Factor = 1/(1+r/100)^n

*Present value factor at 12%: (1/1.12)^1 = 0.893; (1/1.12)^2 = 0.797;

(1/1.12)^3 = 0.712; (1/1.12)^4 = 0.636

The rest of the computations are similar to simple payback period

Discounted payback period = Years before full recovery + (Unrecovered

cost at start of the year/Cash flow during the year)
3 + *44,350/286,200 =3.15 years

*800,000 – 755,650

We observe that the outcome with discounted payback method is less

favorable than with the simple payback method and according to this
method the initial investment would be recovered in 3.15 years.

The project is not acceptable according to discounted payback period

method because the recovery period under this method (3.15 years) is
more than the maximum desired payback period of the management (3
years).

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 Techno International New Town
Software Engineering Part - IB Prof. A K. SAHA

Advantages and disadvantages of discounted payback

method
Advantages/benefits:
 It takes into account the time value of money by deflating the cash
flows using cost of capital of the company.
 The concept backing the method is easy to understand.

Limitations/disadvantages:
 Both simple and discounted payback method do not take into
account the full life of the project. The overall benefit and
profitability of a project cannot be measured under these methods
because any cash flows beyond the payback period is ignored.
 It may become a relative measure. In some situations the
discounted payback period of the project may be longer than the
maximum desired payback period of the management but other
measures like accounting rate of return (ARR) and internal rate of
return (IRR) etc. may favor the project.

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