Total Cost of Ownership (TCO)
While this analysis is based on the cost of a computer system,
it can be applied to any new project
Assessing the Total Cost of Ownership (TCO) is difficult. To create a
model, all costs must be included including hardware, software, and cost of implementation. After
that a certain system lifetime and how the organization uses the system must
be considered.
Hidden from any TCO analysis are the opportunities created by having (or
lost by not having) the system.
Initial
purchase expenses are only one component of the cost-equation. The total cost
of ownership (TCO) takes into consideration the aggregate cost-impact of
technology, including the cost of support personnel, user self-management,
maintenance, and up grade costs. By understanding the TCO as well as their
functional requirements, today’s IT managers can select technology which
best meets their technical and business needs. Both the financial package and
the hardware must be evaluated together.
One
of the mistakes most often made in the Investment analysis is to consider all
costs. Too often, only the cost of the "equipment" or if lucky, the
cost of software is considered in the cost. The major cost is Not these costs
but rather the company's investment in the time to adapt to and effectively
use a new system. Another cost is the time that it takes to continuously
update or "tune the system."
Prime
objective
of the Total
- Assess
the effectiveness of the current computer system in terms of hardware
infrastructure, application systems and databases, and computer staff organization
and management.
- Determine
if the organizations information system requirements are being
met
- Identify
if new information technology is needed
- Recommend
an overall implementation plan if it is determined that additional
information technology is needed
Analysis
- The
present hardware structure and the present software applications
- The
present hardware structure and new software applications
- A
new hardware structure with new software applications
- Capability
to handle and process detailed resource utilization studies for every
natural classification of expense for all departments, direct and/or
indirect (overhead)
- Reconciliation
of identified expenses to actual financial statements
- Internal
indirect cost allocations to both the departmental and service levels.
This is very important, since the indirect expenses allocated to the
departments often exceed their direct expenses. The allocation of these
expenses to the departments and to the services is a critical point in
monitoring full costing and is often not given the detailed review it
deserves.
- Ability
to maintain a very large number of statistical bases for allocating costs
- Updating
of information quickly. The cost accounting system should interface with
the other financial systems software operating on the same hardware, thus
eliminating a second manual entry of current financial information.
- Interface
with the case-mix system. The cost accounting system should be able to
pass cost information to the case-mix system (which ideally would accept
five cost fields per service: direct, indirect, fixed, variable and total)
and accept information from the case-mix system to review profitability of
service and cost variances from standard.
- Budget
system interface – preferable flexible product line budgeting.
- Support
of multi-unit users on the same system
- Ability
to support both standard and allocated costing methodologies for all
services.
- Variance
reporting –reports comparing standard and actual costs and corresponding
variances
- Base
data file – a file that contains resource utilization study information
from national averages or standards, to be used to allocate costs to those
services not directly studied.
- Grouping
or “roll-up” feature – allows for easy comparison of departments and
administrative responsibility areas as well as inter-unit comparisons,
etc.
- Extensive
security features – identifying and limiting users as desired.
- Data
entry ease. A data entry person should be able to enter the information
directly from input forms.
- General
ledger reclassifications – should allow reclassifications inter- and
intra-departmentally
- Support
of fixed, variable, and semi-variable classification of expenses by
department
- Rapid
recalculation response time. You should be able to recalculate entire
organization information or each department individually.
- Maintenance
of the organization wide cost accounting information base within the
singular system. The cost accounting system should support the whole
organization’s cost information base. Avoid systems that have only the
capability to maintain departments as separate entities.
Cost
(1)
Cost of the hardware needed to run the Applications
(2)
Cost of the operating system
-
Availability
of local vendor support
-
Cost effectiveness in term of maintenance of
hardware, as well as implementation of applications and data conversion
-
Ability to up-date existing applications
(3) Cost of the people to operate the computer systems
(4) The efficiency of the computer systems in the overall plan
(5) The efficiency of the applications that are being run on the machine.
(6)
Cost of the programs for the system
-
Cost effectiveness in term of acquisition and
maintenance of software, as well as application and data conversion
-
Ability to up-date existing applications
(7) Cost of the people needed to run the
applications
(8)
Cost of operating the system
-
Provide
a method to minimize data recording and reporting.
-
Provide
a system that provides complete and valid data.
-
Provide
a system that prevents duplication of data
-
Provide
a system for rapid detecting and reporting of potential problems.
-
Flexible
in that it can be easily changed Training personnel how to use the system
-
Standardized
data entry format that can easily accept input from other systems
-
Inexpensive
to implement
-
Update
of financial system programs
-
Provide
information in a timely and consistent manner.
-
Results
in a form that can be used by the responsible parties.
(10)
Saving due to reduced complexity of the environment
(11)
Re-use cost.
Back
to Top
Example:
Detail Analysis (AS400
vs. PC Compatible)
(costs are not up to date)
Cost
of the Hardware needed to run the Financial System
AS400:
Since
the AS400 is a proprietary system and add-on hardware is very expensive. There
are very few companies except IBM that make add-ons for the system. Because of
the tremendous growth over time in hardware needs, such as additional disk
capacity, additional memory, and additional network connection devices, the
purchase of hardware for the AS400 will become very expensive. An example 64
megs of RAM for the PC costs $100, the same 64 megs for the AS400 is close to
$2243.
The
present AS400 only has 4.2GB of Disk and if any type of management information
database is to be maintained additional disk capacity much be purchased. A
4.19GB disk for the AS400 is $3000. The same size drive for a PC costs less than
$200.
Additional
hardware needs to be purchase for the AS400 just in order for it to connect to
the network at XXX. Again this hardware is very expensive.
PC
Workstation:
Additional
hardware for the PC can now be purchased from many vendors at commodity prices.
Cost
of the Operating System
In
today's world, the operating system of one machine must be able to integrate
well with others systems. Gone is the proprietary machine and its limitations.
The operating system must be an open system that allows for easy installation of
hardware and software. This allows for easy training of personnel.
It prevents the need to train several different teams of employees to
perform different work on different machines.
A
report by Touche and Company, one of the largest
accounting/computer consultant in the world, reports that having two
different operating in the same organisation increases costs by up to 40% in
managing their Information Technology Department: “Deploying Windows NT in
Technical Workstation Environments.” Although this report focuses on the Unix
system for its comparison, it equally holds true for the AS400, and probably
more so since the AS400 is a proprietary operating system. (report available on
request)
AS400:
There
is only one IBM AS/400 vendor locally and he does not appear to be well
trained. The cost of the hardware maintenance for the AS400 is over $1,000 per
month. Although the fee
entitles you to call on IBM for service,
that doesn't mean that the machine will be back up and running within a
short time. XXX has experienced significant delays in service from the local
IBM agent. In addition to this cost, there is the cost of having long down
time if the machine needs repairs and if parts need to be imported. There is
no backup to the system. If there is no backup of the system and it goes down
the whole accounting department goes down. At the present there are only
between 10-15 AS400s in the country, and it has been stated by the Director of
the largest computer company in the country, that only about half of these
machines are still operable. There are very few AS400’s and therefore the
maintenance personnel of IBM has very little experience in repairing these
systems
The AS400 has a proprietary operating system and uses its own “brand”
of operating system (OS/400), programs, control functions, data base management
programs, etc.
It will not work on any
other computer platform. Therefore every time a new version comes out, costs
will have to be incurred to up-date the existing operating system. These costs
are very high and in some cases IBM have refused to maintain the system unless
the operating system was upgraded.
The AS400 system as stated by an independent consulting company
is “relatively complex and usually beyond the capabilities of normal
users…” We definitely believe that any organization should stay away from
any system that is “relatively complex and usually beyond the capabilities of
normal users”…
PC
Workstation:
Microsoft NT is the operating system of choice for PC’s .
The cost of the hardware maintenance for PC workstation is very slight if
any. XXX has two staff that is trained in maintenance of PC’s. Backup’s can
be done automatically to another PC every night. Therefore there is no down time
if a PC needs to be repaired.
Cost
of the people to operate the machine
AS400:
XXX has only one individual that is capable of running the AS400 with any
type of skill. Some other personnel
can run the system at a very low skill level. If new personnel have to be hired,
the training process becomes very costly.
Because the operating system is proprietary, training of personnel is
difficult and time consuming. Training is also very expensive because since
there is not enough demand for training in this country, these people have to be
sent to Thailand. If attempts are made to hire people trained in the operating
system of the AS400, top wages have to be paid because there are fewer trained
people.
PC
Workstation:
This country has very fine schools for computer training. Training is
readily available in as many as 10 different schools. There is absolutely no
need to send anyone out of this city. Before of the ready available of
personnel, wages tend to be lower and few problems are encountered in obtaining
people to work. Also since
there are more people to choice from, it is possible to select people with
higher skill levels.
Cost
of the machine in the overall plan
AS400:
The AS400 is totally different than any other equipment in the
XXX.
Additional staffs have to be maintained just to keep the AS400 system running.
Additional hardware has to be purchased just to connect to the rest of the
XXX’s network. No other program running in the XXX can be used on the AS400.
The current network monitoring system cannot access the AS400. If the AS400
needs attention, the computer administrator must be physically present at the
site. If a PC needs attention, it can be managed anywhere in XXX, from the
administrator’s house or anywhere in the world .
The backup on the AS400 is now done by copying it to a tape drive.
However, if the machine goes down, there is no way to use the data that is on
the tape. This would be disastrous for payroll. In no case should a system be
implement in the financial department that is not capable of running on another
machine in case the first machine goes down. (see problems with maintenance).
The existing financial system has no way to integrate its security system
with XXX wide network. Therefore,
secure access to the financial database is made more difficult from a network
system.
PC
Workstation:
Completely integrated with all over systems in the XXX. Security can be
assigned at the database level, at the file level, and at the column level or
the row level. Everyone on the network or Internet can access any information
that they have permission to view.
Cost
of the Programs for the System
Programs must be written in a language that can be portable from one
system to another. These programs must also have the ability to import data from
other systems and must be written in a modern language that makes full use of
object programming. Proprietary programming is at least three times the cost of
a non-proprietary program.
AS400:
The original financial programs at XXX were written in mostly RPG II and
are now over 20 years old. PRG II had a lot of problems on the IBM computers
that it was designed for, and should be even worst on a new system that uses a
different type of processing. I have made three conversions and was able to get
only 70% of the programs running without a complete rewrite. The reason for the
long time in getting the mainframe converted was because it was impossible to
find anyone that could do it in this country. A consultant from India had to be
hired in order to get the job done. This implies that if the XXX wanted to made
any changes to these old financial programs it would have the same problems.
Some simply modifications are possible, such as producing simply lists, but
there is no easy and fast way to "rewrite” the present system on the
AS400. It is a complicated system and any rewrite would be piecemeal. What is
worse, it does not produce the management reports that are needed to run a
modern organization.
There are no “off-the-shelve” programs. The programs that are
available are generally custom written. Because there is not a large demand for
any one program, the programs are costly, hard to modify, and the support has a
very short life span.
PC
Workstation:
Programs for NT can be purchased “off-the-shelve”. Modifications are
easy and all programs integrate well with one another. Because there are many
vendors that compete, new updates are always being introduced and the prices are
competitive. Programs are designed in a way that more than one person can access
the file at one time, therefore allowing for more efficient +processing of
information.
Cost
of the financial programs that are being run on the machine
AS400:
The only financial packages for the AS400 are mostly custom packages with
very little distribution. No distributor of a financial package was available in
this country. The cheapest package available in the USA was over $6,000 per
modular, almost 4 times the price of a PC financial package ($1,500 per
modular).
PC
Workstation:
Accounting and Payroll packages where the first computer programs
developed. They are cheap. The systems are integrated, easy to use, and provide
many Decision Making/Management reports. Most packages includes an integrate
system of payables, inventory control, financials, accounting, payroll, purchase
ordering, and asset management. Since these financial functions are much the
same across all different types of organizations, very little modification needs
to be made for implementation. This also implies that the package that is
purchased is good, cheap and secure. Because of the large demand for financial
packages, they are inexpensive and are easy to modify in order to meet the many
different requirements of their customers.
In the mid-range systems today there are ACCPAC (27%), MAS 90 (18%),
Platinum (17%), Solomon (15%), Dynamics (11%), Macola (9%), and others (3%).
As you can see, there are many different systems that are widely
distributed. This keeps the prices down and increases the competition to keep up
with enhancements to the system.
Cost
of the People Needed to run the Financial Packages
The
financial package must be easy to learn and easy to use. It must make the
fullest use of menus and on-line tutors.
AS400:
It
is unknown what it would cost to train a person to use a custom-programmed
package. Since it would be a new program in the sense that no one had previously
worked with the package, the learning curve would be great.
PC
Workstation:
Because of the wide distribute of the financial
packages, many people have worked with the systems.
(see the enclosed articles on AAA)
Cost
of operating the financial system
Present
Financial System (only…not a new financial package purchased directly for the
AS400)
This
conversion of the old system was nothing more than duplicating the programs that
was already being used. These programs are old, inefficient, ineffective and
slow. The programs now probably function less efficiency than before because a
conversion always takes a program that was built for one system and puts it onto
another system that is was not built. Many of the programs have been slowly
converted to a semi-database form, but all still rely on the old hierarchical
system.
The
present system is mostly batch-file processing with very little integration
within the finance department and none outside the finance department. The
personnel department has to exchange data with the AS400 by creating a
“text” file on a floppy diskette, transferring it to the AS400, and then
reconverting it. There is no connection between purchasing and finance; all
data has to be entered manually at a minimum of two times. The budget system
and the finance system are two separate systems that have to be reconciled
separately. Data in many places has to be entered twice. The only way to get
lists is by printing them out and then going through the data, item by item,
to find what you want. As an example, when trying to find a computer on the
inventory, it took two days to get the computer inventory list that was 80
pages long. The only way to find the particular computer was to go through
every single item. There is no way to make ad hoc queries to determine the
relationship between any two events. As an example, now you cannot even
determine the total expenses on a division except by adding up all the costs
of the separate budget costs for that division manually.
This
is not to say that a good financial system could not be written or purchased
for the AS400. The XXX has a very capable programmer. This does say, however,
that the present financial system must be totally rewritten and this will not
be easy or can in be done in a short time.
These issues are discussed in other sections.
PC
Workstation:
Programs
for the PC Workstation can be just as bad as that outlined about for the old
system, however, there are also very good financial packages using the
relational database concepts.
Cost
of the System in Re-Use
AS400:
The
AS400 can only be used for one thing. When it can no longer serve the purpose
that it is now serving, it must be discarded.
PC
Workstation:
When
the PC is no longer serving the function of a financial server, it can be
given to someone else to be used in another application. It is reusable. Even
its parts and case can be taken apart and moved to another PC.
Intangible Costs and benefits
Improve
Managerial Efficiency.
Managerial efficiency and informed decision making can only be improved
by having access to better information. The new system must be capable of
producing these reports. The Finance Division has very little in terms of
management decision reports and it is an insufficient system. The only reports
that are being generated are those that compare expenses with budgets and that
only until the end of the current fiscal year. There is nothing to indicate
whether the resources are being managed properly.
Allow
More Budget Flexibility
The
organization should introduce a system of devolved budgets. Budgets will be
continuously developed and not only “at the end of the year” as is now practiced.
This means that each and every period the present budget will be examined and
updated to reflex the true situation. This will also provide a cash flow
report that can actually be used for forecasting.
Budget
holders will be given the information needed to make their informed decisions
and they will be trained how to use this information. The budget holders will
be responsible for their own decisions.
The
system will provide for incentives to the project managers to be more
efficient.
Allow
Project Managers to have more control over their projects.
By
providing on-line information regarding their projects, PI’s can manage
their own budgets more effectively. This provides the flexibility needed into
today’s world to compete.
Provide
information to contain costs and invest its funds efficiently.
All expenses will be
examined more closely. What is important is that funds used by the be viewed
like any other investment. “Containing
Cost” is not be the issue. Maximizing the benefit of the use of these funds
is. If those funds that are spent
return more in the way of benefits and reduce costs in the long run, then those
funds are considered a worthwhile investment.
Improve
Donor Co-ordination
By
implementing an improved Financial System, Donors can have “on line”
information of their projects at anytime they care to access that information.
The staff at XXX need not even know that the Donors are doing an audit.
By letting the donors have access to this information, they will feel
more assured that everything is above board, they will have faster
information, and they will have it in the form that they want. When the
auditors do come to the XXX for their audits, they and XXX will already know
that they want and will be able to provide that information easily.
Areas
of Integration with the Financial System:
-
Purchase
ordering which maintains the purchase requests, commitment of budget,
setting up accounts payable, receiving of goods and services, and posting
received goods to Fixed Assets and Central Store systems
-
Central
Store or Inventory Control system, which maintains supplies and materials
commonly used by the XXX, and provides information such as reordering,
quantity on hand, expiry dates especially for pharmaceutical items, and
monthly consumption reports for efficient and effective operation of the
hospital and research activities
-
Maintenance
Management and Work Order system under the Engineering & Maintenance
Branch
-
Staff
Clinic I.S. that maintains information on over 8,000 employees and their
dependents related to their personal data and health history.
Back
to Top
Major Recommendations:
Data
Base Server
The
recommended Operating system
for ALL servers and PC’s in the XXX is Microsoft's
NT. It is believed that there should only be one “system” to manage. NT
is that choice. With multi-systems in any organization, there would be a need
for many special programmers, and many special computer operators and this will
bring on lots of problems, which will require very high salaries. In addition,
the integration of one system within and to another system is more difficult and
requires special interfaces, which requires more hardware and software to
manage. NT is the fastest
growing server software on the market; it is low-cost, shrink-wrapped and can
run on any PC clone or a Sun computer. NT is a completely integrated system. It
has built in networking, a file/print server, a built-in Internet server, a
built-in database server, and a built-in Intranet/Internet server. Its tight
coupling with other Microsoft products such as Windows, BackOffice, and
Networking makes it a natural server to integrate with a PC environment. Data
flows seamlessly in all Microsoft products, from MS Windows 95, to MS Word, to
MS Access, Excel, to MS SQL server, to MS Internet.
NT Sever has a familiar Windows 95 screen; it can be installed in only a
few hours by using easy to use menus, and it is easy to learn. When up-grading,
it is only necessary to go to your friendly computer store and pay about $265
for a shrink-wrapped package upgrade. It has no problems running “PC”
programs.
In
our suggestion of Windows NT, all programs are completely integrated.
Purchase
of the Accounting package AAA
AAA, A financial package that has been selected for review, is the top
selling financial package in the world and is supported by the largest Software
Company in the world. It can be purchased “off the shelve” and be installed
and up and running in let than a month.
AAA (see enclosed articles) is well supported, used by many people here
in this country. Both Canada and China have used it to set their standard
accounting procedures.
It is a relational database system that can sit on a multitude of
database platforms and is well supported by third party programmers. It is
constantly being made a "better system" and is already in its third
version. There is no need to worry about a better system because this system is
always being updated.
It can be run on a PC server using Microsoft NT, it integrates with
Microsoft Excel for statistical analysis, and it can also be used with a
Microsoft SQL database.
AAA
itself will convert the plain text files to the format for the package.
It
is easy to learn because it has "help"
screens on line and has "tutors"
that guide you through any procedure.
It
is a relational database that can produce management information reports in any
form and on any data within minutes of the request. This is the most important
aspect of any decision.
There
is no need to buy additional equipment and MS BackOffice is already running on
the XXXs' computers. In addition, the financial package is "Internet
compatible" and donors can easily access "their projects" at any
time over the Internet for on-line auditing.
There
are many third party support vendors available.
Back
to Top
General Discussion
An organization
will never get better just by buying new equipment. An organization can only
improve itself by improving the systems that they use. XXX needs a new
financial accounting package. Clearly there are financial packages that have
been written for the AS400 but they are at least 5-10 times the price of a
compatible PC program. In addition, since these programs are only written for
the AS400 there is a clear risk in buying a package that can only run on one
machine.
The
dangers involved in implementing an IT system is taking too much time to do
it. In the XXX's case, it took them four years to implement a package that was
recommended back in 1993. The system as implemented today is already obsolete.
It is true that it is always possible for someone to identify some other
system that might work better, but by the same token, it is foolish to buy
into an obviously bad system that can not be changed when the better system
does come alone. No matter
what system you buy, even if it is a system that runs on the AS400, time will
have to be spent to make "adjustments."
The time needed to adjust the AS400 programs will take more time and
more skill because it will have to be written to AS400 format.
There
should only be one operating system in an organization. This will allow for standardization,
ease of training, and ease of maintenance. There is no need for multiple
groups of people to take care of all the different systems. The AS400 is an
added system that can only cost time and money.
There
is no mission-critical application at XXX that requires a fast response time
100% of the time.
Software
sharing and updates are a big problem in the XXX. Many people are using old
and “time consuming” programs that are subject to data integrity problems,
“hang-ups” and “bring the system down” behaviours. The new
software for Windows 95 and NT prevents many of the problems that incurred
with DOS. The recommendation is that all DOS programs be eliminated throughout
the XXX. A good Network Server can act as an “application server” where
only one copy of an application package is needed for the entire network. A
larger selection and newer versions of applications can be made available to
the entire XXX. Having all software in one place also makes it easier to keep
all application programs updated and free of viruses. This is especially true
of specialized programs such as statistical packages.
E-mail
and Internet Service are a must and Microsoft NT comes with a built in e-mail
and Internet Server program. The Internal e-mail and the external e-mail are
completely integrated into one easy to use system.
All
data entry screens, front end data base programs, and special financial
programs can be written in
MS
Access. This program integrates with all of Microsoft products such as
Word
and Excel, and Microsoft
SQL.
It is easy, fast, cheap, can be taught to a programmer within a few days. A
complete input screen can be developed within 30 minutes. There is no need to
send people off to school and spent huge sums of money on training. By sending
more people for training locally, we can train these people better and faster.
Thus there will be many people available at any time to write Access programs.
Not only that, but the people that actually use the reports can learn Access
and be able to better manager the XXX.
Total Cost of Ownership
-
Project Costs
-
Capital Cost
-
Operating Costs
-
Cost of Software
Most budgets that
are developed around computer systems completely underestimate the project
cost. Software development is estimated at 5 times higher that the amount
spent on the physical system. If the developing country has no software, or if
the software is so old as to be completely outdated, it is far cheaper and
provides more benefits to purchase new software.
Human Resources
Staffing
Staffing will be minimized because of better use of highly trained
personal.
All highly trained staff will be at one location only. This location will
be a centralized management center that includes all specialist in operating
system, networking, database management statistics, family planning,
demography, and etc.
This provides the following benefits:
-
Reduces
the problem of finding qualified personal and retaining them (easier to
keep people if they are in "the big city")
-
Management
can be better control (all in one place)
-
Updating
skills (having the ability to learn from one another)
-
The
exchange of ideas is enhanced by everyone working in a close community.
Training
Cost of training
Scarcity of skilled
workers
Expensive and need
to send to schools out of country
Once they are
trained can get better jobs somewhere else
-
Cost of equipment
-
Servers
-
Workstations
Training personal in the use of the system is perhaps easier than most
"experts" believe. It was found in one country, that the staff had a
genuine interest in learning something new. They felt that by being taught to
use the computer, their skills were more marketable.
Now we just have to find a way to keep all the games off the machines!!!
Setup Costs (non recurring)
Operating Costs (recurring)
Hardware/Software/Networking
- Hardware and software costs are minimized by using very simple computers
with either a Web browser or MS Access as a front end tool.
- There need be only one location where expensive computers are located. The
cost of this location can be distributed among all the difference locations
where no one location will have a large expensive.
- Laptops, although twice as expensive than desktop computers for the same
power, are suggested for those areas where power outages are a problem. In
many developing countries, a "back-up" power source is now more
expensive than the computer itself. There should be a minimum of two
computers in each location where one will always serve as a back-up. These
two computers can be networked by using a simple hub and their data can also
be replicated to a remote data source.
- Almost all countries now have some means of internal networking, either by
phone or microwave. Networking is an item that all countries should consider
as a investment worth while not only for health care but for industry in
general.
What there Is Not
- Expensive of dissemination of information either as reports, publications
or results
- Large investments in training updates (distant learning)
- Large investments in traveling to and from clinical areas
- Reduced Number of surveys
- No large support staff is needed at the user level because all new
programs, updates, and local monitoring may be done over the Network.
CDC Investment Guide
The elements of benefit-cost analysis include:
- Identify Assumptions and Constraints - Assumptions are explicit
statements used to specify precisely the environment to which benefit-cost analysis
applies. The purpose of assumptions is to reduce complex situations to manageable
proportions.
- Identify and Quantify Benefits and Costs - Benefits and costs should be
quantified in monetary terms wherever possible. All types of benefits and costs should be
included. The benefits should be linked to the program goals and needs identified in
previous planning steps, e.g., strategic plan and requirements analysis. Benefits and
costs should be estimated over the full life cycle of each alternative considered. Life
cycle costs include all initial costs plus the periodic or continuing costs of operation
and maintenance and any costs of decommissioning or disposal. Estimates of costs and
benefits should show explicitly the changes that result from undertaking the project.
- Evaluate Alternatives Using Net Present Value - Investment alternatives
should be evaluated using net present value criterion. Potential projects should be ranked
according to the discounted value of their expected benefits less the discounted value of
expected costs. Qualitative evaluation considerations, such as explicit legal or
regulatory requirements, considerations of business strategy, or unquantifiable social
benefits or costs, may override quantitative criteria in deciding on the final ranking of
project alternatives.
- Perform Risk and Sensitivity Analysis - Benefit and cost estimates are
typically uncertain. Risk analysis can be used to identify where the relevant
uncertainties exist or where development work will be needed to resolve the uncertainties.
Sensitivity analysis should be used to test the response of the investment's net present
value to changes in key assumptions.
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