Question

Discuss the different cost–benefit analyses that companies must take into account when they formulate an IT strategic plan.

Answer 1

Answer:

The various cost-benefit analyses that companies must take into account when they formulate an IT strategic plan are:

1. Analysts use the net present value (NPV)
2. Return on Investment (ROI)
3. Breakeven analysis  

Explanation:

To formulate an IT strategic plan means to create an IT plan that helps with the organization's long-term and short-term objectives. Many times there are several alternatives to select from. The alternative with the greatest amount of benefit and at the least cost to the organization is the best.

A comparison between the cost and the benefits of each alternative is called cost-benefit analyses. Note that "analyses" is plural.

Some of the methods that are utilized to evaluate each alternative plant for costs against benefits are:

Net Present Value (NPV) approach adopts the investment point of view in the analysis of the cost and the benefits accruable from an IT Strategic Plan.

NPV examines the present value of cash inflows and the present value of cash outflows over a period of time with a view to compare the difference between both factors. When applied to IT strategies, it is assumed that the benefits accruable from the IT project can be compared in monetary terms. A project with a positive NPV is a viable project. Those with zero NPV will return exactly the amount invested. A negative NPV is a loss. The project with the highest NPV is the most valuable in terms of cost versus benefits.

Return on Investment (ROI)

This approach is similar to the NPV. The project with the highest ROI and the least cost will pass for the best IT strategy.

Return on Investment is simply the result of dividing the Net Profits by the Initial cost of the investment. It is measured in percentages. The IT plan with the highest percentage is the best.

Breakeven Analysis

This also assumes that the expected results from the IT plan are measurable in monetary terms. A company is said to have broken even when they have recovered the exact amount invested into a business.

The shorter the breakeven period, the better the business/IT strategy.

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