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50 Information Technology Systems at AirportsA Primer Table 5-1. Examples of benefit valuation. per year for a medium-sized airport. If each passenger generates $15 in revenue through park- ing, landing fees, concessions, and so forth, that's $150,000 of additional revenue for the airport. This becomes a quantifiable financial benefit of the system. Stakeholders are the place to turn for such information because they typically have the data needed to turn intangible benefits into financially meaningful ones. 5.3 Determining Total Lifecycle Costs A key factor in deciding to invest in a new system is the cost. Capital costs (one-time costs) are often the only costs used when making investment decisions. However, ongoing O&M costs should also be considered when evaluating a new system because many of the system benefits are derived during the O&M phase. The TLC of a system is defined as the sum of all one-time (non- recurring) costs and recurring costs over the full life span of a system. For IT systems, the life span is usually only 3 to 7 years because technology changes at a high rate in the industry. Table 5-2 reflects common costs to consider when calculating the TLC for a system. 5.4 CostBenefit Analysis A costbenefit analysis, performed after the system benefits and TLC have been determined, is a process for assessing a project's business case. The TLC is weighed against the system's total expected benefits to determine if there is a positive return. Figure 5-1 shows a suggested spread- sheet format (with sample data plugged in) to use when performing a costbenefit analysis. The formulas for the spreadsheet can be complex and should be implemented by CFOs. For ease of understanding, the financial discussions in the following are presented at a high level.

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Evaluating IT Investments--A Common Decision Tool 51 Table 5-2. Common lifecycle costs. Lines 1 through 3 represent the expected one-time costs of the system. Line 1--Project Direct Capital Costs. Typically any cost for the project (not O&M) that will require a purchase order, such as the direct cost of the vendor who will supply the system, hardware, software, and implementation services. Beyond that obvious cost there may be other direct capital costs, such as consultants or design firms to complete some of the design steps, develop specifications, provide guidance during procurement, oversee implementation, or conduct independent validation and verification tasks. Line 2--Project Labor Costs. The costs of airport personnel to execute the project. A one-time expense, project labor costs do not include vendor implementation labor, but they do include airport IT department and stakeholder labor and the following types of work: Project management Design and requirements definition Procurement Data cleansing and entry Test plan review Figure 5-1. Sample costbenefit analysis.

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52 Information Technology Systems at AirportsA Primer Testing and implementation oversight Initial training Line 3--Outside Funding. In many cases, an airport project's capital costs can be offset by funding from the FAA (through AIP or PFC eligibility), Transportation Security Administration (TSA), or other federal or state grant sources. Funding is discussed in more detail in Chapter 4 under the planning phase. Lines 4 to 7 represent the financial benefits to be achieved by implementing the system. These are the annual recurring costs, cost savings, or cost avoidance for each of the years in the evaluation period. Line 4--Net Change to Revenue. A given project can cause one or more sources of revenue to increase or decrease, usually related to a change in the number of units (passengers, planes, cars, etc.) resulting from the project's implementation. Occasionally the project allows for unit-price changes (e.g., higher parking rates, square foot lease rates, or concessions fee percentage) because the project improved the perceived value of the commodity. In other cases, the project creates a new revenue source where none was there before, so estimates of the unit volume and unit price both have to be made for each year. Line 5--Net Change to Direct O&M Costs. Represents the cumulative effect of direct O&M cost changes, which would be reflected as budget changes in years following the project's implementation. Direct costs are nonlabor expenses such as hardware and software mainte- nance, required telecommunications services, and consumables such as paper, printers, ribbons, and ID cards. Elimination of previous direct costs should also be taken into account; that is, costs from the current system that go away when the project is completed and the old system is decommissioned, such as expensive consumables, maintenance on obsolete equipment, or telecommunications circuits. Line 6--Net Change to O&M Labor Costs. Sometimes the labor to keep the new system run- ning can be converted to direct costs through outsourcing and/or maintenance contracts. This category must include labor in the IT system and stakeholder organizations that is required to operate and use the system. Labor no longer required to operate the old system should be subtracted if the project involves replacing an older system. Line 7--Interest on Capital Avoidance/Deferral. By implementing one project, the capital required for another project can sometimes be deferred or avoided completely. Projected inter- est savings on the money not spent because a project was deferred is represented as a sav- ings associated with the project being implemented. Lines 8 and 9--Net Cash Flow and Cumulative Cash Flow. Net cash flow represents the total investment in the system, taking into account all the projected costs over the evaluation period minus the financial cost savings achieved by implementing the system. The cumulative cash flow shows the expected net cash flow for each year of the system life span in the evaluation period. After calculating all costs and benefits and entering them into the spreadsheet, the data can be analyzed to assess the value of the system. Three important factors are usually calculated when performing a costbenefit analysis: NPV IRR Break-even point Line 10--Net Present Value. Brings all project costs into the present, taking the net monthly savings over the evaluation period (adjusted by the cost of money), presenting them as a lump sum, and subtracting net capital costs. If the result is still positive, the project is worth doing. The NPV is a means of representing the magnitude of the benefits of the investment or, simply put, is an indicator of the value of an investment. Line 11--Internal Rate of Return. Used in capital budgeting to measure and compare the prof- itability of investments. The IRR is an indicator of the efficiency of an investment. The higher a project's IRR, the more desirable it is to undertake. Assuming all other factors are equal among various projects, the one with the highest IRR should probably be given highest priority.