Part II (50 marks) You have been working on planning a systems project designed to significantly enhance your company's main information system, which has been developed and maintained internally. You and another BA have worked for two months in May and June of 2020 to develop the project's Business Requirements specifications, which at this point includes complete requirements, excluding detailed user interface designs. (Hint: See Table A to estimate the accuracy implications of this.) The average overall cost per hour for you and the other BA is $100, and your company assumes 160 hours per month in labor per full-time employee. Based on those Business Requirements specifications, the IT team has a single figure, most likely case" estimate that it will take a team of fourteen people-BAs, developers, testers-six months, July through December, to construct and deliver those enhancements. The average overall cost per hour for the team works out to $75. This suggests that go live" for the enhancements will happen at the beginning of January of next year (2021). Further, the business projects efficiency gains that will translate into increased profits of $800K in 2021, $1M in 2022, and $1.2M in 2023. (Your company only projects benefits with a three-year planning horizon.) Note that, because this is an existing, operational system, there are no added license or system infrastructure costs anticipated for the project. Based on this data: a. Assume your company uses the ROI approach to evaluate systems project, including requiring at least a 2:1 (ROI = Estimated Business Benefits / Estimated Systems Costs) benefits/cost ratio and preferring a 3:1 ratio. Based on the data provided, how do you evaluate the project based on the "most likely case" estimate? Explain your answer. (10 marks) b. Per Table A below, what is the implication for the accuracy of remaining development costs at this point? (Remember that the two months of work that you and the other BA did is already complete and, as such, not subject to estimating error.) As a BA, should you accept being asked to finalize a project business case where you will need to commit to the "most likely case" estimate? Why or why not? What might be a more reasonable cost-estimate figure to commit to, again per Table A? (10 marks) C. Using that "cost/benefit estimate figure to commit to" from the prior point, reevaluate the project Rol using the same criteria as above. Is the project still worth doing? How has the evaluation changed from point (a) above? (5 marks) d. Complete the cost/benefit analysis grid that follows (Table B), using the cost-estimate figure you will commit to from point c. Count the Business Requirements costs already incurred as noncapitalized IT labor. The other costs should be counted as capitalized IT labor and amortized over thirty-six months. When counting business benefits, do not adjust for the time value of money. (10 marks) e. In what year does the project begin to show an overall positive net profit impact? (5 marks) f. Assume the firm has a weighted average cost of capital (WACC) of 6 percent. How would that impact the net present value of business benefits in 2020, 2021, and 2022? How does the overall impact of applying the WACC discount rate to the business benefits compare to the overall impact of the "padding" (normally done to account for contingency) of the cost estimate?" (10 marks) Table A Acceptable estimation error Low side High side Range of high to low estimates Initial concept 0.25% (-75%) % 4.0x (+300%) 16% Approved product definition 0.50% (-50%) 2.0x (+100%) (+ 4x Requirements complete 0.67% (-33%) 1.5x (+50%) 2.25 User interface design complete 0.80X (-20%) 1.25x (+25%) 1.6X Detailed design complete 0.90% (-10%) 1.10X (+10%) 1.2x Table B Costs Profit impact One-time Capital Annual 2019 2020 2021 Total Cost/benefit categories Amortization period Live date IT labor (noncapitalized) Jan 2021 IT labor (capitalized) 36 months Jan 2021 Licenses Jan 2021 System infrastructure Jan 2021 Total costs Business benefits (positive values) Net profit impact (positive values) Part II (50 marks) You have been working on planning a systems project designed to significantly enhance your company's main information system, which has been developed and maintained internally. You and another BA have worked for two months in May and June of 2020 to develop the project's Business Requirements specifications, which at this point includes complete requirements, excluding detailed user interface designs. (Hint: See Table A to estimate the accuracy implications of this.) The average overall cost per hour for you and the other BA is $100, and your company assumes 160 hours per month in labor per full-time employee. Based on those Business Requirements specifications, the IT team has a single figure, most likely case" estimate that it will take a team of fourteen people-BAs, developers, testers-six months, July through December, to construct and deliver those enhancements. The average overall cost per hour for the team works out to $75. This suggests that go live" for the enhancements will happen at the beginning of January of next year (2021). Further, the business projects efficiency gains that will translate into increased profits of $800K in 2021, $1M in 2022, and $1.2M in 2023. (Your company only projects benefits with a three-year planning horizon.) Note that, because this is an existing, operational system, there are no added license or system infrastructure costs anticipated for the project. Based on this data: a. Assume your company uses the ROI approach to evaluate systems project, including requiring at least a 2:1 (ROI = Estimated Business Benefits / Estimated Systems Costs) benefits/cost ratio and preferring a 3:1 ratio. Based on the data provided, how do you evaluate the project based on the "most likely case" estimate? Explain your answer. (10 marks) b. Per Table A below, what is the implication for the accuracy of remaining development costs at this point? (Remember that the two months of work that you and the other BA did is already complete and, as such, not subject to estimating error.) As a BA, should you accept being asked to finalize a project business case where you will need to commit to the "most likely case" estimate? Why or why not? What might be a more reasonable cost-estimate figure to commit to, again per Table A? (10 marks) C. Using that "cost/benefit estimate figure to commit to" from the prior point, reevaluate the project Rol using the same criteria as above. Is the project still worth doing? How has the evaluation changed from point (a) above? (5 marks) d. Complete the cost/benefit analysis grid that follows (Table B), using the cost-estimate figure you will commit to from point c. Count the Business Requirements costs already incurred as noncapitalized IT labor. The other costs should be counted as capitalized IT labor and amortized over thirty-six months. When counting business benefits, do not adjust for the time value of money. (10 marks) e. In what year does the project begin to show an overall positive net profit impact? (5 marks) f. Assume the firm has a weighted average cost of capital (WACC) of 6 percent. How would that impact the net present value of business benefits in 2020, 2021, and 2022? How does the overall impact of applying the WACC discount rate to the business benefits compare to the overall impact of the "padding" (normally done to account for contingency) of the cost estimate?" (10 marks) Table A Acceptable estimation error Low side High side Range of high to low estimates Initial concept 0.25% (-75%) % 4.0x (+300%) 16% Approved product definition 0.50% (-50%) 2.0x (+100%) (+ 4x Requirements complete 0.67% (-33%) 1.5x (+50%) 2.25 User interface design complete 0.80X (-20%) 1.25x (+25%) 1.6X Detailed design complete 0.90% (-10%) 1.10X (+10%) 1.2x Table B Costs Profit impact One-time Capital Annual 2019 2020 2021 Total Cost/benefit categories Amortization period Live date IT labor (noncapitalized) Jan 2021 IT labor (capitalized) 36 months Jan 2021 Licenses Jan 2021 System infrastructure Jan 2021 Total costs Business benefits (positive values) Net profit impact (positive values)