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SPM UNIT-2 (Lecture-3)

Cost-benefit analysis (CBA) is a technique for comparing the total costs and benefits of a project to determine its net value, often used at the start of a project to evaluate different options. Cash flow forecasting estimates the cash flow over time, helping organizations plan expenditures and ensure sufficient funds for project completion. Risk evaluation involves assessing and prioritizing risks to determine necessary mitigation strategies, crucial for effective decision-making in various fields.

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19 views

SPM UNIT-2 (Lecture-3)

Cost-benefit analysis (CBA) is a technique for comparing the total costs and benefits of a project to determine its net value, often used at the start of a project to evaluate different options. Cash flow forecasting estimates the cash flow over time, helping organizations plan expenditures and ensure sufficient funds for project completion. Risk evaluation involves assessing and prioritizing risks to determine necessary mitigation strategies, crucial for effective decision-making in various fields.

Uploaded by

suryakantshastri.gn
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Software Project Management

UNIT-2
Lecture-3
Cost-benefit analysis
1. Cost-benefit analysis (CBA) is a technique used to compare the total costs of a
programme/project with its benefits, using a common metric.
2. This enables the calculation of the net cost or benefit associated with the programme.
3. It is used most often at the start of a programme or project when different options or
courses of action are being appraised and compared, as an option for choosing the best
approach.
4. It can also be used, to evaluate the overall impact of a programme in quantifiable and
monetized terms.
5. CBA adds up the total costs of a programme or activity and compares it against its total
benefits.
6.The technique assumes that a monetary value can be placed on all the costs and benefits of
a programme, including tangible and intangible returns to other people and organizations in
addition to those immediately impacted.
7. Advantage of cost-benefit analysis explicitly and systematically consider the various
factors which should influence strategic choice.

Steps used in cost-benefit analysis:


Step 1: Specify the set of options:
Identify a range of genuine, viable, alternative policy options to be analyzed.
Step 2: Decide whose costs and benefits count:
For most regulatory proposals, measuring the national costs and benefits is appropriate, rather
than measuring any international impacts.
Step 3: Identify the impacts and select measurement indicators:
a. Identify the full range of impacts of each of the options.
b. It is important to identify the incremental costs and benefits for each option, relative
to the base case.
Step 4: Predict the impacts over the life of the proposed regulation:
a. The impacts should be quantified for each time period over the life of the proposed
regulation.
b. The total period needs to be long enough to capture all the potential costs and
benefits.
Step 5: Monetize impacts:
a. Assigning a net Rupee value of the gains and losses of a regulatory initiative for all
people affected is one useful way to measure the effects of a proposed change.
Step 6: Discount future costs and benefits to obtain present values:
a. The need to discount future cash flows can be viewed from two main perspectives,
both of which focus on the opportunity cost of the cash flows implied by the
regulation.

Cost-Flow
Cash flow is the movement of money in and out of an organization. It involves the
expenditure and income of an organization. This article focuses on discussing Cash flow
forecasting in detail.

Cash Flow Forecasting


Cash flow forecasting is the estimation of the cash flow over some time. It is important to do
cash flow forecasting to ensure that the project has sufficient funds to survive.
 It gives an estimation of when income and expenditure will take place during the
software project’s life cycle.
 It must be done from time to time, especially for start-ups and small enterprises.
 However, if the cash flow of the business is more stable then forecasting cash flow
weekly or monthly is enough.

Cash Flow Forecasting

Types of Cash Flow Forecasting


1. Positive Cash Flow: If an organisation expects to receive income more than it
spends then it is said to have a positive cash flow and the company will never go low
on funds for the software project’s completion.
2. Negative Cash Flow: If an organisation expects to receive income less than it
spends then it is said to have a negative cash flow and the company will go low on
funds for the software project’s completion in future.

Importance of Cash Flow Forecasting


1. It allows the management to plan the expenditures based upon the income in future.
2. It helps the organization to analyse its expenditures and incomes.
3. Makes sure that the company can afford to pay the employees and suppliers.
4. Helps in financial planning.

Cost-benefit evaluation techniques:


Net profit: The net profit of a project is the difference between the total costs and the total
income over the life of the project.
Payback period:
1. The payback period is the time taken to break even or payback the initial investment.
2. Project with the shortest payback period will be chosen on the basis that an
organization will wish to minimize the time that a project is 'in debt'.
3. The advantage of the payback period is that it is simple to calculate and is not
particularly sensitive to small forecasting errors.
4. Its disadvantage as a selection technique is that it ignores the overall profitability of
the project; it totally ignores any income (or expenditure) once the project has broken
even.
Return on investment:
1. The return on investment (ROI), also known as the accounting rate of return (ARR),
provides a way of comparing the net profitability to the investment required.
2. It is used to calculate the return on investment, but a straightforward common version is:

ROI = average annual profit *100/total investment


Net present value:
The calculation of Net Present Value (NPV) is a project evaluation technique that takes into
account the profitability of a project and the timing of the cash flows that are produced.

Risk Evolution
Risk evaluation is the process of assessing and prioritizing risks based on their potential
impact and likelihood of occurrence. It helps organizations or individuals determine which
risks need to be addressed and what actions should be taken to mitigate them.
Key Steps in Risk Evaluation:
1. Identify Risks – Recognizing potential threats or uncertainties that could impact
objectives.
2. Analyse Risks – Assessing the likelihood and severity of each risk.
3. Prioritize Risks – Ranking risks based on their significance.
4. Determine Risk Tolerance – Deciding whether a risk is acceptable or needs
mitigation.
5. Develop Response Strategies – Creating plans to manage, mitigate, transfer, or
accept risks.
Risk evaluation is widely used in fields like finance, business, healthcare, cybersecurity, and
project management to ensure better decision-making and risk management.

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