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68 Part 1 • SyStemS analySiS FundamentalS

Figure 3.12
Year 1 Year 2
Cash-flow analysis for a Quarter 1 Quarter 2 Quarter 3 Quarter 4 Quarter 1
computerized mail-addressing
system. Revenue $5,000 $20,000 $24,960 $31,270 $39,020
Costs
Software
development 10,000 5,000
Personnel 8,000 8,400 8,800 9,260 9,700
Training 3,000 6,000
Equipment
lease 4,000 4,000 4,000 4,000 4,000
Supplies 1,000 2,000 2,370 2,990 3,730
Maintenance 0 2,000 2,200 2,420 2,660

Total Costs 26,000 27,400 17,370 18,670 20,090

Cash Flow –21,000 –7,400 7,590 12,600 18,930
Cumulative
Cash Flow –21,000 –28,400 –20,810 –8,210 10,720

CASH-FLOW ANALYSIS. Cash-flow analysis examines the direction, size, and pattern of the cash
flow associated with the proposed information system. If you are proposing the replacement
of an old information system with a new one and if the new information system will not be
generating any additional cash for the business, only cash outlays are associated with the project.
In this case, the new system cannot be justified on the basis of new revenues generated and must
be examined closely for other tangible benefits if it is to be pursued further.
Figure 3.12 shows a cash-flow analysis for a small company that is providing a mailing ser-
vice to other small companies in the city. Revenue projections are that only $5,000 will be gen-
erated in the first quarter, but after the second quarter, revenue will grow at a steady rate. Costs
will be large in the first two quarters and then level off. Cash-flow analysis is used to determine
when a company will begin to make a profit (in this case, it is in the third quarter, with a cash
flow of $7,590) and when it will be “out of the red”—that is, when revenue has made up for the
initial investment (in this case, in the first quarter of the second year, when accumulated cash
flow changes from a negative amount to a positive $10,720).
The proposed system should have increased revenues along with cash outlays. Then the
size of the cash flow must be analyzed, along with the patterns of cash flow associated with the
purchase of the new system. You must ask when cash outlays and revenues will occur, not only
for the initial purchase but also over the life of the information system.
PRESENT VALUE ANALYSIS. Present value analysis helps a systems analyst present to business
decision makers the time value of the investment in the information system as well as the cash
flow (as discussed in the previous section). Present value is a way to assess all the economic
outlays and revenues of the information system over its economic life and to compare costs
today with future costs and today’s benefits with future benefits.
In Figure 3.13, system costs total $272,000 over six years, and benefits total $280,700.
Therefore, we might conclude that benefits outweigh the costs. Benefits only started to surpass
costs after the fourth year, however, and dollars in the sixth year will not be equivalent to dollars
in the first year.

Figure 3.13
Year
Without considering present value, 1 2 3 4 5 6 Total
the benefits appear to outweigh
the costs. Costs $40,000 42,000 44,100 46,300 48,600 51,000 272,000

Benefits $25,000 31,200 39,000 48,700 60,800 76,000 280,700