LESSON 3:

PROJECT FEASIBILITY STUDY

OBJECTIVES:
At the end of this lesson, students will be able to:

▪ Define and understand the importance of feasibility study in information

system projects;

▪ Understand and differentiate operational feasibility, technical feasibility,

schedule feasibility and economic feasibility;

▪ Identify and apply the steps involved in doing feasibility study;

▪ Describe various scheduling techniques and apply the steps in creating the
PERT and GANTT Chart diagram;

▪ Cite some of the most common reasons for performing a cost-benefit

analysis; and

▪ Determine how to compute cost and benefit analysis.

Duration: 8 Hours
 Thoughts to Ponder

"At the beginning of all experimental work stands the choice of the appropriate
tecHNIQUE of investigation."

-Walter RUDolf Hess

Defining Feasibility Study

“A feasibility study is an analysis that gathers all the vital factors of a project,
including economic, technical, legal, and scheduling considerations —to establish
the possibility of successfully completing the project. It has been used by project
managers to discern the pros and cons of undertaking a project before they
invest tons of your time and money into it”. (Kenton, 2020)

Feasibility studies are a tremendous help to the company's management to

provide them the necessary information and data enough for them to decide to push
through with any project and prevent them from entering blindly to risky projects in
the future. It identifies the likelihood of improving an existing system, develops a
replacement system, and produces refined estimates for further development of a
new system. It is intended to obtain the outline of the necessary documents and
choose whether a feasible or appropriate solution exists or not. Its main goal is to
accumulate problem scope rather than to solve the problem. The output of a
feasibility study may be a formal system proposal act as a decision document that
incorporates the fundamental nature and scope of the proposed system.

Steps Involved in the Feasibility Study are as follows:

● Create a project team that will lead the activity and choose a project leader.
● Develop system flowcharts.
● Pinpoint the shortfall of the existing system and enumerate the choice solution or
potential candidate system to satisfy goals.
● Determine the feasibility of every alternative, like technical feasibility, operational
feasibility, etc.
● Weight the performance and price effectiveness of every candidate system.
● Rank the opposite alternatives and choose the simplest candidate system.
● Prepare a system proposal of ultimate project directive to management for
approval.
Types of Feasibility Study

A feasibility study plays a vital role in the success of one's potential project;
therefore, biased judgement is an essential factor in the credibility of the result of the
study, especially to the management. There are four types of feasibility studies that
are separately discussed and described below.

Technical Feasibility. It refers to the exploration to determine whether the solutions

are often supported by existing technology or not. The system analyst knows
whether existing technical resources need an upgrade or inclusion of new
requirements must be requested. Technical feasibility makes sure that the existing
system provides proper responses to what extent it can assist in the technological
enhancement of the company. Some of the questions to find out whether an
information system project is technically feasible are as follows:

● Is the project viable within the restrictions of existing technology?

● Is it a practical proposition?
● Does the technology exist at all?
● Is it available within given resource constraints?
● Are the existing technological resources enough for the proposed
system?
● Can it be improved to provide the level of technology required for the
proposed system?
● Do we have the appropriate technical expertise?
● Can technological resources be easily applied to current problems?
● Do the proposed technological resources have the capacity to
handle the solution?
● Do we currently possess the necessary technology?

Operational Feasibility. It determines whether the system is functioning effectively

once it is developed and implemented. It ensures that the management should
support the proposed system and it is working feasible within the present
organizational environment. It analyzes whether the users are getting to be affected
by whether they accept the modified or new business methods that involve the
possible system benefits. It also ensures that the electronic and technical resources
and specifications of the existing system are workable. The essential questions that
help in testing the operational feasibility of a system include the following:

● Does the existing mode of operation offer essential management to

protect against fraud and to assure accuracy and security of
information?
● Does existing operation make use of available resources efficiently,
including people, time, and flow of transactions?
● Does the current mode of operation provide reliable services?
● Are the services flexible and expandable?
● If the system is developed, will it be adopted by the user?
● Does management support the project?
● Are the users satisfied with existing business practices?
● Are the existing business practices and procedures enough to support
the proposed system?
 ● Does management support the project?
● Are users having difficulty with existing business practices?
● Does management support the project?
● Will it reduce the time of operation considerably?
● Does the overall response increase when it comes to accessibility of
information? Will the system considerably affect the stakeholders?

Schedule Feasibility. It determines that the proposed project should be finished

within a given period or schedule. It also verifies whether the deadlines of the project
are reasonable to finish or not. In this feasibility study, the project managers got to
give proper attention to controlling the conduct of its schedule feasibility for them to
calculate and continually re-examine whether it's possible to finish all amount and
scope of labor lying ahead, utilizing the given amount of resources, within the
specified period.

Economic Feasibility. It refers to assessing the effectiveness of the proposed

system by using a cost/benefit analysis that includes details of the costs and terms of
the benefit that the organization will get from it. The main goal of conducting
economic feasibility is to have an approximation of the economic requirements of the
proposed system before the company's expenditures are committed to the project
proposal. Possible questions raised in economic analysis are:

● Does the system cost significant?

● Do benefits outweigh costs?
● The whole cost of doing the system
● The cost of business employee time
● The estimated cost of hardware
● The estimated cost of software packages/ development
● Is the project can be finished, given the resource constraints?
● Cost of employees' time to do the study
● Cost of software packages/ development
● Options among alternative financing
arrangements (rent/lease/purchase)

In doing economic feasibility analysis, a cost-benefit analysis (CBA) is used to

appraise whether the project is worth undertaking. It gives the costs and benefits of
different scenarios to determine the benefits that offset the costs.
(Note: Detailed discussion of the preparation of the cost and benefit analysis
will be given in the next lesson.)

Project Scheduling Technique

We need to use scheduling techniques during a project to align all its aspects
with figuring like one another. A schedule should be in proportion with the time set for
the project, and every one of its resources should be utilized in the best manner.
Given the variable nature of the project and its scope, It is hard to plan it, but we are
expected to try to to it because it is we who are going to be held responsible. A
schedule should have all the activities included within the implementation
and execution of a project within the set time-frame of the project.
A project schedule helps prioritize work involved during a project and finish
it off in an orderly manner. It also helps appoint the proper person for the work and
properly allocate the available resources. Time allotment and adjustments with the
scope of a project is merely possible if there is an appropriate schedule prepared for
the project.

Project scheduling includes the following four-step process:

1. Using the list of activities identified in the standard SDLC as a guide,

remember all individual tasks.
2. Estimate the size of the task: the number of human resources, the
person-days required, the calendar time needed, and any other unique
resources that may be required.
3. Determine the sequence for the identified tasks. The team accomplishes this
step by determining which tasks are predecessors for a given job.
4. Schedule the tasks themselves, taking into account that resources cannot be
double-scheduled.

When performing on projects involving valuable resources, every manager

worth their salt tries to optimally utilize those resources to the most superficial extent
possible, while, at an equivalent time, striving to complete the project on schedule.

PERT(Project Evaluation and Review Technique) Chart

A PERT Chart may be a visual tool that project management uses to

schedule, organize, and coordinate activities of their project. In every project, a list of
tasks is broken down called Work Breakdown Structure or (WBS) to complete in a
definite sequence, which defines the project. Resources required to finish each task -
in terms of cash, material, and manpower - are listed.
One simple advantage of making a PERT chart during project planning is the
insight it provides on the critical path. In our network diagram below, a critical path is
that the longest path is traversed from the starting node to the ending node, in terms
of the whole of the calendar time taken to understand each intermediate node. All
activities on this critical path must be completed for the project to finish on time.
Seen during this light, each activity within the critical path could even be a critical
activity, to tend the utmost attention. Resources from tasks that are not critical
are often reallocated to assist critical path elements should issues arise, or
inevitably unforeseen conditions occur. On the other hand,
activity outside the critical path is often delayed without the project getting delayed -
for a specific amount of some time. PERT experts call this the Slack Time for that
specific activity. PERT allows managers within the planning divisions of
organizations to speak and consolidate ideas. They are also effective for
evaluating the performance of teams and individual members. These charts are also
a superb visual basis for gauging the design and analytical skills of team leaders.
PERT analysis also promotes cost-effectiveness and optimal use of manpower
because the process determines the time-frame for a project to be also completed
because of the risks involved. ("Diagram – PERT”, n.d.)
 Figure 2.6 Example of PERT Chart of Sales Promotion Tracking

Figure 2.6 shows places the project milestones or tasks, time to do a task,
earliest start date/time (ESD), and the earliest finish date (EFD) inside the tasks box.
The horizontal axis shows the time measures in weeks, and the vertical axis shows
the sequence of those project milestones or tasks. It also includes a legend that
serves as a guide in identifying which among your project milestones or tasks is your
critical path.

How to Develop a PERT Chart?

The Information System Project will benefit from using one of the diagrams in
the project scheduling tool. The steps in this process are very alike to identify the
critical path of your proposed system, which is extremely helpful since these
diagrams are one method for mapping out that path. (Morpus, 2020)

Six steps in creating a PERT chart diagram are as follows:

1. List your project milestones and tasks.

2. Identify the sequence of those tasks.
3. Determine the time criteria for your tasks.
● Earliest start date/time (ESD/EST): It is the most initial possible time to
begin a task in your project. To know the earliest start date or time, you
must understand all of your task dependencies inside and out.
 ● Earliest finish date/time (EFD/EFT): It is the most initial possible time
you hope to finish a particular task. It is determined by adding up all of
the previous dependent step times, including the duration of this
specific step you are trying to quantify.
● Time to complete: This is the duration of time you plan on spending to
finish each task.

Once you have determined all three of these criteria and listed out the
sequence of your tasks, you have ready to create your PERT chart.

4. Draw up your PERT diagram.

5. Draw out your critical path.
6. Update your PERT chart as needed.

Gantt Chart
The project schedule Gantt chart may be a useful visualization technique for
progress tracking and reporting purposes. It is the go-to tool for many project
managers once they want to urge a fast estimate of the time it'll fancy completing all
the project activities. A project schedule Gantt chart could also be a bar chart that
shows series of activities or tasks in sequence on the left (first activity is at the very
best left and last activity ends within the bottom right corner) vs. time (on the highest
or bottom). Each activity or task is represented by a bar that reflects the start and
date of the activity, and thus its timescale. The chart showed all the activities or tasks
when they were set to start and to finish, how long each activity will last, where there
are overlaps of activities, dependencies between activities, which are connected with
arrows and, therefore, the start/end date of the whole project.
If the Gantt chart isn't a neighborhood of a project management system, it's very flat
and has similar limitations to the task list, like little collaboration, no versioning, or
progress tracking. ("Most Common Scheduling Techniques in Project Management,"
n.d.)

Pros:
• Adaptable to all industries and projects
• Easy to view progress
• Ability to set accurate deadlines and define dependencies
• Easily modified
• Can be created in Microsoft Excel or in a project management system
• Ability to assign tasks to resources

Cons:
• If the Gantt chart is not part of a project management system, it is flat
• No versioning
• Limited collaboration
• No progress tracking
Steps in Creating A Gantt Chart
Gantt chart as one of the project scheduling techniques used when you create
or manage any kind of system project that has many tasks associated with it.
Consider this: If task ID No. 2 cannot begin until task ID No.1 is complete—and task
ID No.1 takes at least two weeks to complete—we cannot begin task ID No.2 for two
weeks. So it only means that the project will take a minimum of two weeks, plus the
length of completion for task ID No.2. It seems simple to understand, but when you
have many dependencies, it is a little confusing to plot the tasks and need to allocate
your project team's time as effectively as possible. (Foley, 2020)

For a better understanding of how the processes all fit together, below are the
steps in creating a Gantt Chart:

1. Begin with a project or drive in mind.

2. Assess the present plan for this project in place.
3. Determine which tasks are hooked into each other.
4. Compile the time frames that include all the tasks in your Gantt chart layout.
5. Repeatedly use your Gantt chart as a reference.

Figure 2.7 Example of Gantt Chart of Sales Promotion Tracking

 Figure 2.7 represents another way of creating or managing any project
milestones with many tasks associated with it. Schedules of tasks are presented in
the horizontal axis, including the sequence of tasks, project milestones or tasks, time
to do a task which includes starting date and ending date. The duration of project
milestones was measured in weeks, and it also provides legend that serves as a
guide in identifying which among your project milestones or tasks is your critical path,
non- critical path, and in progress.

What Is Cost And Benefit Analysis?

Cost-Benefit Analysis or CBA is a relatively straightforward tool for deciding

whether to pursue a project. In the information system project management, it is one
tool that can be used mainly in identifying whether it is economically feasible or not.
It is a tool that has been designed to assess the cost versus the benefits in your
proposed project proposal. It starts with a list, as so many processes do.
It is essential to understand the real goals why we are conducting cost and
benefit analysis, as stated by (De Rus, 2020) in his rationale of cost and benefit
analysis; he explained that cost-benefit analysis is not only about money. It is neither
about inputs or outputs; it is about welfare. The value of this economic tool is to
assist within the selection of the best projects and policies for the benefit of society.
Money is central to financial analysis but only instrumental within the economic
appraisal of projects and policies.
Cost and benefit analysis may be a list of each project expense and what
the advantages are going to be after successfully executing the project. From
that, you will calculate the return on investment (ROI), internal rate of return
(IRR), net present value (NPV), and the payback period. The variance between
the value and the benefits will allow you to decide whether to pursue a data
system project or not.

When Do We Perform A Cost And Benefit Analysis?

It is a non-comprehensive list of the foremost common reasons for performing
an analysis, but if you so desire, you will perform one for almost any decision you
create. We do that a day once we prioritize some tasks over others.
The five most vital Instances for conducting analysis for your business are as
follows:
1. Making a new hire.
2. Kicking off a new project.
3. Adopting a new software tool.
4. Administering a new business practice or process improvement.
5. Making a market pivot.
How To Conduct A Cost And Benefit Analysis?
Conducting a cost-benefit analysis is a straightforward process that you can
complete in three steps.

1. List out your costs and benefits. It is the easiest step in the process of
performing a cost-benefit analysis. List all of the costs and benefits of engaging in
a specific action. If you are looking to hire someone new, for example, these
costs and benefits might include:

Costs:

​ Agency finders fee

​ HR screening time
​ Jobs boards fees
​ Background checks
​ Time spent training and onboarding
​ Salaries and benefits
​ Potential misaligned hire

Benefits:

​ Improved efficiency
​ Lighter workloads across teams
​ Higher quality work
​ More experience on the team
​ New areas of expertise
​ Decreased risk of team burnouts
​ Potential networking opportunities

Assessing cost and benefit is a process of identifying the financial benefits and
costs associated with developing an information system project. The project is
assessed in terms of cost and benefit to decide whether to continue, redirect, or stop
development.

One-Time Cost is defined as a cost related to project start-up and development or

system start-up.

These costs encompass activities such as:

● Systems development,
● New hardware and software purchases,
● User training
● Site preparation
● Data or the system conversion

Recurring cost is defined as a cost resulting from the continued evolution and use
of a system.
Examples of these costs include:
● Application software maintenance,
● Incremental data storage expenses,
● Incremental communications,
● New software and hardware leases, and
 ● Supplies and other expenses (for instance, paper, forms, data center
personnel).

In determining project cost, you should remember the following:

● Procurement which includes the following such as consulting, equipment, site
preparation, capital, management time
● Start-up which includes operating systems, communications installation,
personnel hiring, organizational disruption
● Project-related such as application software, software modification,
personnel overhead, training, data analysis, documentation
● Operating Costs such as system maintenance, rental, asset depreciation,
operation, and planning.

It is not a problem when your list of costs and benefits might come out uneven
with more items than the other. Your analysis is not finished here since you
continue to have not assigned any value metrics.

Tips in doing your costs and benefits is that before you jump into listing these
effects, make certain to utilize of these tips below so you will build the foremost
comprehensive lists possible:

• Be sure your action is obvious. When analyzing the analysis of a

proposed action, your goal must be specific and clear. For instance, instead of
check out the analysis of adopting a project management software, drill right
down to the actual software option you have in mind. This way, you will
account for the various variables inherent in making your choice, like price,
features, support,etc.

• Include present also as future costs/benefits. The simplest analysis

not only looks at the more immediate effects of a choice but also the potential
future outcomes of creating that call, like scope sneak in projects. These costs
are crucial afterward when handling future project planning.

2. Establish a worth framework for your costs and benefits. As stated in

Step No. 1, having more costs or benefits does not mean anything unless
you assign a weighted value to every point. This value framework usually
consists of cash , since everything you are doing as a business will either
contribute to or deduct from your bottom line.

Allocating monetary values to your costs and benefits in some cases

could be easy, like determining the salary of a replacement hire or calculating
the yearly cost of shopping for a replacement software tool. There are points that
are not as upfront and obvious, like the time spent training your employees on
the way to use software that might rather be spent working. Producing cost
analysis like these would require some math on your part, like deciding the
worth created through a particular amount of labor during a
certain amount of your time. Tips for establishing a worth
framework are as follows:
• Sort your costs by type. There are all kinds of costs involved during
this quite analysis;

a) Breakdown of One Time Cost Worksheet and Recurring Cost

Breakdown of One Time Cost Worksheet included costs such as
development costs (developer's honoraria), user training expenses
(trainer's honoraria and training kit supplies), additional hardware and
software for the proposed system (devices, computer, etc.), and recurring
cost(software maintenance, incremental communication, and software
license renewal etc.). Recurring cost should also be computed, which is
the sum of all recurring expenses, including any costs that the company is
regularly incurring. (Note: Figure 2.8 below are a detailed example of the
said Breakdown of One Time Cost Worksheet and Recurring Cost)

Figure 2.8 Breakdown of One Time Cost Worksheet

b) Breakdown of Tangible Benefit Worksheet included costs such as

annual supplies cost of all consumed in the proposed system(pen,
ballpen, folder, paper, ink, etc.) and labor cost of all involved in the
proposed system (employees salary). Sort out your costs by each type
for identification purposes.
 Figure 2.9 Breakdown of Tangible Benefit Worksheet

Figure 2.9 above shows a detailed example of the Breakdown of Tangible

Benefits Worksheet, which includes explicit computation of supplies cost consumed
annually, both the existing and proposed system, labor cost for annual employee's
salary expenses of both the existing and proposed system.
Create best-case vs. worst-case scenarios. Since a number of these
costs/benefits are certain, while others are not set in stone (such as rent vs.
productivity levels), it is just to run several potential value scenarios with each
uncertain factor. Benefits are presumably to be suffering from these scenarios since
they were not as easily quantified. It should be incorporated into any contingency
plans you will eventually draw up afterward before executing a business decision or
project. Benefits can be quantified by getting the Total Cost Reduction, which is the
sum of what you save in the salary of the employees and the supplies that you use
through the enhancement of the existing system. You can also assume an additional
labor cost in the employee's salary through system upgrade. (Note: Figures 2.9
above and Figures 2.10 and 2.11 shown below are examples of that said quantifiable
benefits).
Figure 2.10 Additional Cost Reduction Based on Employees Salary

Figure 2.11 Computation of Net Economic Benefit Worksheet

3. Perform cost-benefit analysis. There are several reasons for employing
an analysis, the obvious one is to work out the anticipated financial returns
and profitability of an investment or a project. Afterward, different
options are compared with one another supported cost-benefit analysis. It is
an idea for decision-making and, therefore, the selection of the
choice or choice to choose (source). It is usually included within the project
business case and an important step to try before initiating a data
system project. The initial analysis results also function as a baseline for the
measurement of success in an ongoing project. Thus, they assist project
managers, sponsors, and other stakeholders to live, monitor, and
manage the worth a project is creating against the first expectation.
(Sebastian, 2020)

Once you have assigned values to every cost and benefit, it's time to gauge
whether your proposed action would offer a positive benefit to your business.

In order to conduct this analysis, you need to use the subsequent formulas:

Once you have assigned values to each cost and benefit, it is time to assess
whether your proposal would provide a positive benefit to your business.

In order to conduct this analysis, you will need to use the following formulas:

​ Net Economic Benefit =Total Cost Reduction+Error Cost Reduction

​ Discount Rate = [1 ( / (1 + i)^n )

​ Where:

​ i = Discount rate (or interest rate)

​ n = the number of year in the future the cash flow is

​ PV of Benefits= Net Economic Benefits * Discount Factor

​ One Time Cost =Total Development Cost + Total User Training + Total
Additional Hardware/Software
​ PV of Recurring Cost= Recurring Cost * Discount Rate

​ Overall NPV=NPV of All Benefits-NPV of All Costs

The results of the Cost-Benefit Analysis can be used to assess and consider
certain risks of a project. An example is finding the NPV, ROI and payback period,
which are vital to find out in a proposed system project.
How NPV, ROI, and Payback Period Works?

When deciding to acquire new technology or business asset, companies

typically assess if the said investment will have a short return payback using financial
metrics like return on investment (ROI), net present value (NPV), and payback
period. ROI, NPV, and payback period interest both the customer and seller because
they are the inspiration for building a business case for the investment. These 3
metric tools are used for comparison of your investment
options with other competing business project proposals having an
equivalent amount of capital or budget.
So, ROI, NPV, and payback period, what exactly are they, and what do they tell
us? What is ROI? Return on investment may be a percentage that represents
internet value received from an investment over a given period of your time.

The ROI Formula:

Note: Represented in percentage value (it can be multiplied by 100) and multiplied
on a given period of time based on the projection of the project life span.

For example, if your company invests PHP500,000 in technology and realizes

profits from that investment of PHP800,000, it is as simple as using this
formula(PHP800,000 – PHP500,000) / PHP500,000 = 60%. ROI is very simple. It
tells how you can gain profit from an investment over a given period of your time.
One of the significant drawbacks of ROI is that it does not consider the value of
cash, this might be true if the first or second year ROI is positive, but if ROI is not
positive until year four or five, then this might not be a wise investment. This is also
the reason why the normal time period in Break Even Analysis Table is usually 0 to 5
years approximately, and it is considered the ideal project life span for a good
projection of a system project.

If your ROI value is positive, then it indicates your action would benefit your
business. A negative result would only mean profit loss. Once you have determined
this result, then you can make the decision to either pursue or leave the action
behind. (Note: Figure 2.12 below is an example of the ROI Computation.)

Figure 2.12 Example ROI Computation Taken from Break Even Analysis Table

What is NPV?
Compared to ROI, NPV may be a bit complicated when it involves Net
Present Value (NPV) which is usually employed by technology and business asset
investors because it converts the multi-year benefits and costs of investment into
today's Peso value (or other currency value). This makes it easier to match
investment options. Investors can check out this "normalized" value alongside other
factors (like strategic importance and risk) when making decisions. (Kenton, 2020)
 Most companies are continuously making decisions on the way to manage
their cash inflows and cash outflows like for instance; they will need to decide
between:

● Reducing debt, which yields a return supported their interest rate; Investing in
their own stock;
● Hiring additional employees
● Acquiring technology to manage productivity

In order to level the playing field regarding riskier options (like acquiring a
business or technology), companies establish an expected annual financial return
percent (or hurdle rate). Projections for a proposed investment must exceed the
hurdle rate to be viable.
The NPV formula Net Present Value (NPV) of a series of money flows
supported by a specified discount rate. The NPV formulas are useful for financial
analysis when determining the worth of an investment

NPV for a Series of Money Flows

In most cases, a securities analyst must calculate the Net Present Value of a
series of money flows, not only one individual income. The formula works within the
same way; however, each income has to be discounted individually, then all of them
are added together. (Kenton, 2020)

NPV Formula

Below is the formula for computing the present value of annual cash flow.

Where:
NPV: Net Present Value
F : Future payment (cash flow)
i :Discount rate (or interest rate)
n :number of periods in the future the cash flow is

NPV Formula in Excel

Mostly analyst never computes net present value manually, nor with a
calculator. Instead, they use MS Excel. =NPV(discount rate, series of money flow)
Example of the way to use the NPV function:

1. Set a discount factor rate during a cell.

2. Set up a series of cash flows (must be in consecutive cells).
3. Use this function formula in MS Excel:

NPV= NPV( Discount Factor Percentage, Value of Cash Flow Cells from Year
1 to Year 5 not included the Year 0) + the Value of Year 0.
See Sample computation below:

Figure 2.13 Example Calculation of Net Present Value in MS Excel

As shown in Figure 2.13 we used 12%, assuming that the placeholder

discount rate (hurdle rate) is 12% during that time. Remember that this percentage
needs to be updated with the particular discount rate factor or current rate of inflation
during the amount where the project is initiated. Using 12%, we will calculate the
"discount factor" annually. To do the cash flows discounting, we divide the income
every year by its discount factor. All we are doing is discounting the worth every year
by 12%. As we enter the longer term, we add another 12% discount annually.
(Note: The automatic calculation of that discount factor which will be discussed in the
MS Excel Spreadsheet by your Instructor within the discussion of the example given
in Figure 2.13 above.)

What Is the Payback Period?

Payback period (break-even point) – the point in time at which the increased
cash flow (benefits) settle the costs of development and operation.

Simply put, the payback period is that the length of some time an investment
reaches a break-even point. It directly affects the desirability of an investor to
proceed with the proposed project. Shorter paybacks mean more attractive
investments. The shorter you will get your payback means the higher for you to take
a position your money while the longer it can catch on means not so desirable for an
investor or sponsor. (Kagan, 2020)
 Figure 2.14 Example Calculation of Payback Period in MS Excel

Figure 2.14, which was taken from the Break-Even Analysis Table shown a
specific example of how you will get an actual payback or break-even point. This is
done by computing your Yearly NPV Income on the lower portion of your Break-Even
Analysis Table, followed by Overall NPV CAshflow for you to work out your running
balance in your investment. Overall NPV Income turns positive during the period of
Year 3. Seek out how the calculation is done in MS Excel, below is the mathematical
formula for calculating the payback period.

The actual Payback Period or Break-Even Point has often computed counting
on when the general NPV reaches its positive value. Once you get the particular
number of payback year period then the solution to its reach point is going to be
multiplied by twelve (12) because we have twelve (12) months a year to get the
exact number of months, the decimal value to the present answer will then be
multiplied by 30 which is that the average number of days during a month for you to
urge the particular number of days. When you are done, add it with the
implementation date of the project to come up with the particular date of the payback
period or break-even point.
Figure 2.15 Example of Break-Even Analysis Table
 Figure 2.16 Example of Payback Period Analysis Table

Figure 2.16 in which data was taken from the Break-Even Analysis Table in
Figure 2.15 shows a reflection of how actual payback or break-even point through a
line graph chart where it shows that the X and Y-Axis meet in almost the middle
period of Year 3 and Year 4 which is logically in accordance with our initial estimation
of Year 3, 5 months and 16 days.