Determining the appropriate spend for information and systems: which evaluation technique balances expected benefits against expected costs to guide investment decisions?
Correct Answer: cost-benefit analysis
Introduction / Context:Organizations must justify investments in information systems by weighing total costs against anticipated benefits. A structured appraisal prevents overspending on low-value features and underinvesting in high-impact capabilities.
Given Data / Assumptions:
- Costs include acquisition, implementation, training, support, and risk.
- Benefits include savings, revenue uplift, risk reduction, and compliance.
- We seek the method that considers both sides simultaneously.
Concept / Approach:Cost-benefit analysis (CBA) compares total expected costs with total expected benefits over a defined horizon, often computing net present value (NPV), payback period, or internal rate of return (IRR). CBA supports transparent decisions and portfolio prioritization across competing projects.
Step-by-Step Solution:
List cost components and benefit drivers for the information initiative. Quantify and time-phase both sets where possible. Apply a CBA to compare and rank options. Select “cost-benefit analysis.”Verification / Alternative check:Capital budgeting practices require evaluating both costs and benefits; analyzing only one side yields biased decisions.
Why Other Options Are Wrong:
- Cost analysis: Looks only at costs; incomplete.
- Benefit analysis: Looks only at benefits; incomplete.
- Any of the above: Incorrect because the balanced method is specifically CBA.
- None: Wrong since CBA is the standard approach.
Common Pitfalls:Ignoring intangible benefits, overestimating savings, or neglecting change-management costs; not discounting future cash flows appropriately.
Final Answer:cost-benefit analysis