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Unit-3 Project Evaluation and Estimation
Cost-benefit analysis
It mainly comprise two steps
 Identify and estimating all of the costs and benefits of carrying out the project
and operating the delivered application.
 Expressing these costs and benefits in common units
We need to evaluate the net benefit, that is, the difference between the total
benefit and the total benefit and the total cost of creating and operating the
system.
We can categorize cost according to where they originate in the life of the project.
These are:
 Development costs
 Setup costs
 Operational costs
Cash flow forecasting
A cash flow forecast will indicate when expenditure and income will take place. It is as shown in
the figure:

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Fig: Typical product life cycle cash flow
Cost-benefit evaluation techniques
The following cost-benefit evaluation techniques are:
 Net profit
The net profit of a project is the difference between total costs and the total income over
the life of the project.
 Payback period
The payback period is the time taken to break even or pay back the initial investment.
 Return on investment
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.
Average annual profit
ROI = --------------------------- * 100
Total income
 Net present value
The calculation of net present value is a project evaluation technique that takes into
account the profitability of a project and the timing of the cash flows that are produced.
The present value of any future cash flow may be obtained by applying the following
formula
Value in year t
Present value = -----------------------
(1+r) t

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Where r is the discount rate and t is the number of years into the future that the cash flow
occurs.
 Internal rate of return
The internal rate of return (IRR) attempts to provide a profitability measures as a
percentage return that is directly comparable with interest rates.
Risk evaluation
The following things are:
 Risk identification and ranking
In any project evaluation we should attempt to identify the risks and quantify their
potential effects. One common approach to risk analysis is to construct a project risk
matrix utilizing a checklist of possible risks and to classify each risk according to its
relative importance and likelihood.
 Risk and net present value
Where a project is relatively risky it is common practice to use a higher discount rate to
calculate net present value.
 Cost-benefit analysis
A more sophisticated approach to the evaluation of risk is to consider each possible
outcome and estimate the probability of its occurring and the corresponding value of the
outcome. The value of the project is then obtained by summing the cost or benefit for
each category.
 Risk profile analysis

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By study the results of a sensitivity analysis we can identify those factors that are most
important to the success of the project. There are a number of risk analysis applications
available and produce the risk profiles of the type.
 Using decision trees
The analysis of a decision tree consists of evaluating the expected benefit of taking each
path from a decision point (It is denoted by D). The expected value of each path is the
sum of the value of each possible outcome multiplied by its probability of occurrence.
This is shown as in the figure:
Fig. A Decision Tree
Selection of a an appropriate project approach
The selection of a particular process model could add new products to the Project Breakdown
Structure (PBS) or new activities to the activity network. This will generate inputs for identify
the products and activities of the project.
D
Extend
Replace
Expansion
No expansion
Expansion
No expansion
0.2
0.8
0.2
0.8

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Choosing technologies
An outcome of project analysis will be the selection of the most appropriate methodologies and
technologies. Methodologies include approaches like Unified Software Development Process
(USDP), Structure System Analysis and Design Method (SSADM), and Human-Centered
Design, while technologies include appropriate application-building and automated testing
environments.
The some of the steps of the project analysis are:
 Identify project as either objectives-driven or product-driven
In objective-driven project, we define the general software solution that is to be
implemented, while in product-driven project, the product to be created is defined before
the start of the product.
 Analysis other project characteristics
The following point will arise:
 Is a data-oriented or process-oriented system to be implemented?
 Will the software that is too produced be a general tool or application specific?
 Are there specific tools available for implementing the particular type of
application?
 Is the system to be created safety critical?
 What is the nature of the hardware/software environment in which the system will
operate?
 Identify high-level project risks
The following uncertainty will occur:
 Product uncertainty
 Process uncertainty
 Resource uncertainty

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 Take into account user requirement concerning implementation
 Select general life-cycle approach
Some approaches are:
 Control systems
 Information systems
 General tools
 Specialized techniques
 Hardware environment
 Safety-critical systems
Choice of process models
The word ‘process’ is used to emphasize the idea of a system in action. In order to achieve an
outcome, the system will have to execute one or more activities. A major part of the planning
will be choosing development methods and slotting them into an overall process model.
Structure methods
The principle behind structure method is ‘get it right first time’. The structure methods are made
up of sets of steps and rules which generate system products such as use case diagrams. Some of
them are rapid application development (RAD), waterfall model etc.
The RAD Model
Rapid application development (RAD) is an incremental software development process model
that emphasizes an extremely short development cycle. The RAD model is a” high-speed”
adaptation of the linear sequential model in which rapid development is achieved by using
component-based construction. The RAD approach encompasses the following phases:
 Business modeling
 Data modeling

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Fig: The Process
 Process modeling
 Application generation
 Testing and turnover
Like all process models, the RAD approach has drawbacks:

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 For large but scalable projects, RAD requires sufficient human resources to create the right
number of RAD teams.
 RAD requires developers and customers who are committed to the rapid-fire activities
necessary to get a system complete in a much abbreviated time frame. If commitment is
lacking from either constituency, RAD projects will fail.
 Not all types of applications are appropriate for RAD. If a system cannot be properly
modularized, building the components necessary for RAD will be problematic. If high
performance is an issue and performance is to be achieved through tuning the interfaces to
system components, the RAD approach may not work.
 RAD is not appropriate when technical risks are high. This occurs when a new application
makes heavy use of new technology or when the new software requires a high degree of
interoperability with existing computer programs.
The Spiral Model
The spiral model, originally proposed by Boehm, is an evolutionary software process model that
couples the iterative nature of prototyping with the controlled and systematic aspects of the linear
sequential model.
A spiral model is divided into a number of framework activities, also called task regions.
Typically, there are between three and six task regions. Figure 2.8 depicts a spiral model that
contains six task regions:
 Customer communication
 Planning
 Risk analysis
 Engineering
 Construction and release
 Customer evaluation

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