19.3 Analysis of BenefitCost Ratio


The net present value (NPV) of a software process improvement (SPI) method is what the cash value and economic value of the benefits of a SPI method are worth in the future. In other words, NPV is the economic value less inflation of the benefits. NPV is a realistic measure of how much additional money is gained , saved, or received from use of a SPI method. NPV is a cold, hard, and objective measure of value. It indicates whether the SPI method was worth all of the time, trouble, expense, and investment. There are three inputs, variables , or terms to the simple NPV equation: benefits, inflation rate or rather devaluation rate, and the number of years in which to amortize the benefits. We have already identified the benefits of our chosen SPI methods up to this point. The NPV equation consists of dividing the benefits by the inflation or devaluation rate over time.

However, the NPV model requires that we determine the inflation or devaluation rate of money over time. We must determine the number of years in which to devaluate our benefits. What exactly does NPV do, and why do we need NPV? NPV basically means that money loses its value over time. If we place $10,000 in a safety deposit box and retrieve it some time in the future, it isn't worth $10,000 anymore. Due to inflation, the cost of products and services increases over time. What costs $10,000 today may cost $20,000 a few years from now. Therefore, the estimated benefits of our SPI method may be substantially lower over time, and we need to adjust for the devaluation of our benefits over time. This is especially true for software maintenance or total life cycle benefits. Generally, our benefits occur over a period of many years and must be reduced or devaluated accordingly .

17.1 Software Inspection Process

The benefits of using the Software Inspection Process to help produce 10,000 lines of code are $2,767,464. This was obtained by subtracting $1,742,533 in new total life cycle costs from $4,509,997 in old total life cycle costs.

The special, new, or additional costs that are required to introduce inspections consist of the training and inspection costs. The training costs to prepare four people to use inspections to help produce 10,000 lines of code are $11,240. The inspection cost for our four trained inspectors to evaluate 10,000 lines of code is $70,833. This amounts to nearly 42 Software Inspection Process runs. That totals $82,073 to introduce the Software Inspection Process as a SPI method.

The development cost of $508,000, testing cost of $195,000, and maintenance cost of $967,900 were not included. The development, testing, and maintenance costs either stayed the same or decreased. Had the development, testing, or maintenance costs increased, the differences or the increases would have been included.

Let's determine the benefit/cost ratio (B/CR) of the Software Inspection Process to help produce 10,000 lines of code. Divide the benefits of $2,767,464 by the costs of $82,073 for the Software Inspection Process. The B/CR of using the Software Inspection Process to help produce 10,000 lines of code is 34:1.

Let's determine the adjusted benefits of the Software Inspection Process to help produce 10,000 lines of code. Subtract $82,073 in Software Inspection Process costs from $2,767,464 in gross Software Inspection Process benefits. The result is $2,685,391 in adjusted benefits.

Let's determine the return on investment (ROI) of the Software Inspection Process to help produce 10,000 lines of code. Divide the adjusted benefits of $2,685,391 by the costs of $82,073 for the Software Inspection Process. Multiply the result by 100%. The ROI of using the Software Inspection Process to help produce 10,000 lines of code is 3,272%. Table 26 illustrates the NPV of the Software Inspection Process.

Table 26: NPV of Software Inspection Process

SPI Method

Benefits/Costs

Inspection Benefits (Gross)

$2,767,464

Inspection Costs

$82,073

Inspection B/CR

34:1

Inspection Benefits (Adjusted)

$2,685,391

Inspection ROI

3,272%

Inspection Benefits (NPV)

$2,168,380

Inspection B/CR (NPV)

26:1

Inspection Benefits (Adjusted/NPV)

$2,086,307

Inspection ROI (NPV)

2,542%

Now we are ready to determine the NPV of the gross benefits of the Software Inspection Process to produce 10,000 lines of code. Divide the gross benefits of $2,767,464 by the devaluation rate of 1.27628156. The NPV of the gross benefits of using the Software Inspection Process to help produce 10,000 lines of code is $2,168,380.

Now let's determine the B/CR of the Software Inspection Process to produce 10,000 lines of code using NPV of the gross benefits. Divide the NPV of the gross benefits of $2,168,380 by the costs of $82,073 for the Software Inspection Process. The B/CR of using the Software Inspection Process to help produce 10,000 lines of code is 26:1 using the NPV of the gross benefits.

Now let's determine the adjusted benefits of the Software Inspection Process using the NPV of the gross benefits. Subtract $82,073 in Software Inspection Process costs from $2,168,380, which is the NPV of the gross benefits. The result is $2,086,307 in adjusted benefits.

Finally, let's determine the ROI of the Software Inspection Process to produce 10,000 lines of code using adjusted benefits. Divide the adjusted benefits of $2,086,307 by the costs of $82,073 for the Software Inspection Process. Multiply the result by 100%. The ROI of using the Software Inspection Process to produce 10,000 lines of code is 2,542% using NPV.




ROI of Software Process Improvement. Metrics for Project Managers and Software Engineers
ROI of Software Process Improvement: Metrics for Project Managers and Software Engineers
ISBN: 193215924X
EAN: 2147483647
Year: 2004
Pages: 145

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