Financial Benefits of
Coding Performance Improvement Project
Report on Benefit Calculation
Prepared by: Wu Kim Har
Date: 19th October 2004
How the financial benefits were determined?
There are several ways to determine the
financial benefits. However, the financial benefits
of the Coding Performance Improvement Project and the Follow-up
implementation project were determined by using the Net Present
Value Analysis (NPV analysis), the Return on Investment
(ROI analysis), and the Payback Analysis.
The Net
Present Value (NPV) of a Capital Budgeting
project indicates the expected impact of the project on the value of
the company. It is also a form of calculating
discounted cash flow. It is merely the process of calculating the
discount of a series of amounts of cash at future dates,
and adding them all up. Basically, NPV represents the
relationship between a project's
expected cash flow and the cost of capital. NPV and cost of
capital can help assess
potential external investments. Besides that, cost of capital helps
the Project Manager to
decide whether pay or give up for the money you need for the project
needs. The higher the rate of return, the greater the chances the
project will obtain the stamp of approval and hence it is better.
Return
on Investment (ROI Analysis) is one of several approaches to
building a
financial business case. The term means that decision makers
evaluate the investment potential by
comparing the magnitude and timing of expected gains to the
investment costs. With this
ROI analysis, we can determine whether the project is measure up to
the estimated budget or
not. From there, we can make decisions whether to continue the
operation of the project or not.
We also did the payback analysis and
find the payback period of the project. The
payback period represents the amount of time that it takes for a
Capital Budgeting project to recover
its initial cost. In other words, payback analysis determines how
much time will lapse before accumulate
benefits overtake accrued and continuing costs. Payback occurs when
the cumulative discounted benefits and costs are greater than zero.
How is it calculated?
There
are formulas to calculate NPV, ROI and payback period. All we need
to do is just
insert all the values into the formulas.
To
calculate the NPV, the cash inflows (or projected benefits) and
outflows
(or projected costs) for the project were determined. The cash flow
each year is calculated
by subtracting the costs from the benefits for each year. A discount
rate or the minimum acceptable
rate of return on an investment was assigned. Next, the annual
discount rate is determined and applied to the
costs and benefits for each year. To calculate the annual
discount rate, first, we calculate the
discount factor. The discount factor can be calculated by
multiplying each year based on the discount rate
and year.
The
following is the formula on how to calculate NPV:
where
CFt = the cash flow at
time t and
r =
the cost of capital.
Return
on Investment (ROI) is income divided investment. Like the NPV, the
higher the value of the ROI, the
better it is. The formula below shows how to calculate the ROI for
the project:
How can they be automated?
With the
mass software available in market today, the calculation of the
benefits for a project can be done easily.
Spreadsheet such as Microsoft Excel is one of the easiest ways to
automate the calculations and generate reports. It can be used to
perform cost estimating,
cost budgeting, cost forecasting and cost control besides performing
resource planning.
Project
management software such as Microsoft Project 2000 is also one of
the
better alternatives. It can help to study the overall project
information or focus on tasks that are over
a specified cost limit. For example, we can use the cost features in
Microsoft Project
which makes it possible to integrate total project information more
easily. Additionally, the
software can use to develop Gantt Chart and network Diagram for
better scheduling and
estimation, assign costs and resources to certain tasks, prepare
cost estimates, develop
cost budgets, and monitor cost performance. Microsoft Project 2000
has several standard
cost reports: cash flow, budget, over budget tasks, over budget
resources, and earned value reports.
The work
of preparing financial reports and calculations to obtain accurate
financial information can be very much easier and
convenient with the aid of technologies such as
the software mention above. Nevertheless, training for
employees to utilize the software is necessary.
Conclusion…
With the implementation of
the improved coding, the numbers of supercomputers
and mainframe computing power will be reduced significantly based on
the accurate calculation of the cost estimation
and financial benefits. Hence, cost are cut down due to the savings
come from the decrease
number of mainframes and supercomputers. In addition, the improved
program will run more efficiently, and requires
less time to process. As a result, business process is
speeds up and the company will be able to earn more profits.
