Question

Q. 1: Excel (attach your solution to this sheet A medium-size municipality plans to develop a software system to assist in project selection during the next 10 years. A life-cycle cost approach has been used to categorize costs into development programming, operating, and support costs for each alternative. There are three alternatives under consideration, identified as M, N, and O. The costs are summarized on in the table. Use an annual life-cycle cost approach to identify the best alternative at 8% per year. Alternative Component Development Programming Operation Support Development Estimated Cost (1000 S) 250 now 150 years (1-4) 45 now 35 years (1.2) 50 years (1-10) 30 years (1-5) 10 now 45 year 0 30 years (1-3) 80 years (1-10) 40 years (1-10) 175 years (1-10) Programming Operation Support Operation Grading Sale T elui Chess

Answer 1

Solution: From the above question, we need to find out the best alternative of software development for medium sized alternative. In the present information, we need to find out the least cost among the various alternative , i.e. Alternative ( hereinafter 'Alt') M. Alt N and Alt O.

These alternatives are represented by various life span. We shall equate the life cycle cost with the discounting factor @ 8% and will be as per the no of years for each phases of life cycle cost.

The following is the chart for present value of annuity of $1 for each period at 8% discount rate.

Present value of an Annuity Table @ 8% for various periods.

Alternatives	Phases of Life Cycle Cost	No of years	Discounting factor @ 8%
Alternative M	Development	0	1
	Development	1-4	3.3121
	Programming	1-2	1.7832
	Operations	1-10	6.7100
	Support	1-5	3.9927
Alternative N	Development	Now (0)	1
	Programming	Now (0)	1
	Programming	1-3	2.5770
	Operation	1-10	6.7100
	Support	1-10	6.7100
Alternative O	Operation	1-10	6.7100

Now Let us calculate Equivalent Annual cost (EAC) of each Alternatives

Alt M:

Calculation of Discounted Cash outflow

Stage (a)	Years (b)	Estimated Cash outflows (in '000$) (c)	Present Value @ 8% (d)	Equated Annual Cost (In $) e= (c/d)
Development	0	250	1	250
	1-4	150	3.3121	45.28
Programming	0	45	1	45
	1,2	35	1.7832	35 (Note)
Operations	1-10	50	6.7100	7.45
Support	1-5	30	3.9927	7.5137
		Total Annual Estimated Cost (Total e)		390.24

Note:

This estimated cost of $35,000 had been incurred each year therefore, if we calculated the present value @ 8 % for year 1 and year 2 and divide by same Present value factor for 2 years i.e by 1.7832, we will get the same value of $35,000.

Alt N

Stage (a)	Years (b)	Estimated Cash outflows (in '000$) (c)	Present Value @ 8% (d)	Equated Annual Cost (In $) (e)= (c/d)
Development	0	10	1	10
Programming	0	45	1	45
	1-3	30	2.5770	11.64
Operation	1-10	80	6.7100	11.92
Support	1-10	40	6.7100	5.96
		Total Annual Estimated Cost (Total e)		84.52

Alt O

Stage (a)	Years (b)	Estimated Cash outflows (in '000$) (c)	Present Value @ 8% (d)	Equated Annual Cost (In $) (e)= (c/d)
Operation	1-10	175	6.7100	26.08
		Total Annual Estimated Cost (Total e)		26.08

Recommendations:

From the above analysis equated annual cost for each alternatives , Alternative O is the least cost, and this should be selected if the resources are constrained and there is no need for development , as only the status quo need to be maintained as the operational cost will not create or develop any software system.

However, if the capital creation or development of the software system ( whether tangible or intangible for software system) the out of the Alternative M and Alternative N, Alternative N is to be selected because of its least equated annual cost.