Return on Software
Maximizing the Return on Your Software Investment
Published on 23. April 2009
Book
Paperback/Softback
672 pages
978-0-321-56149-7 (ISBN)
Description
Is your organization getting the maximum value out of its precious, limitedresources (specifically, money, time, and manpower)? Most professionaldevelopers do not consider the business implications of the technical decisionsthey are making -- but they should! In order for software engineering to trulybecome an engineering discipline, software professionals need to know andunderstand the engineering economy.This new book helps software practitioners appreciate the organizationalramifications of each decision they make. It is an insight into the engineeringeconomy that more software organizations aspire to. Each chapter contains aseries of self-study questions to help the reader apply the learned techniques,and the book can also serve as a reference that software engineers can turn to,again and again.
More details
Other editions
Previous edition
Book
08/2004
Addison Wesley
€47.03
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Person
Steve Tockey is the principal consultant at Construx Software, where he consults on active development projects and teaches software requirements, design, quality, and software project management. He has been in the software industry since 1977, and has worked on applications ranging from radiation monitoring equipment to business systems to automated test equipment for commercial airliners.
Content
Foreword.
Preface.
I. Introduction and Foundations.
1. Return on Software: Maximizing the Return on Your Software Investment.
Software on Purpose.
Waste Not, Want Not.
The Primary Message.
A Secondary Message: Software Engineering Versus Computer Science.
An Overview of the Book.
Summary.
Self-Study Questions.
2. Business on Purpose.
Why Are Companies in Business, Anyway?
Business Decisions in For-Profit Organizations.
Business Decisions in Not-for-Profit Organizations.
Business Decisions in Your Own Personal Finances.
Summary.
Self-Study Questions.
3. The Fundamental Concepts of Business Decisions.
Proposals.
Cash-Flow Instances and Cash-Flow Streams.
Cash-Flow Diagrams.
Developing Cash-Flow Streams.
Summary.
Self-Study Questions.
4. The Business Decision-Making Process.
Introducing the Business Decision-Making Process.
Understand the Real Problem.
Define the Selection Criteria.
Identify All Reasonable Technically Feasible Solutions (the Proposals).
Evaluate Each Proposal Against the Selection Criteria.
Select the Preferred Proposal.
Monitor the Performance of the Selected Proposal.
Summary.
Self-Study Questions.
5. Interest: The Time Value of Money.
Time Is Money.
Interest.
Naming Conventions in Interest Formulas.
Simple Interest.
Discrete Compounding of Interest.
Single-Payment Compound-Amount (F/P).
Single-Payment Present-Worth (P/F).
Equal-Payment-Series Compound-Amount (F/A).
Equal-Payment-Series Sinking-Fund (A/F).
Equal-Payment-Series Capital-Recovery (A/P).
Equal-Payment-Series Present-Worth (P/A).
Summarizing the Formulas.
Some Other Handy Relationships.
Summary.
Self-Study Questions.
6. Other Interest(ing) Calculations.
Using Different Interest Periods and Compounding Frequencies.
The Relationship Between Cash-Flow Instances and Compounding Interval.
Continuous Compounding, Discrete Payment.
Determining Actual Interest Rates.
Paying off a Loan Through a Single, Lump-Sum Payment.
Separating Interest and Principal in Loan Payments.
Paying Off a Loan Early Through Higher Payments.
Interest Rates Might Not Be What They Seem.
Summary.
Self-Study Questions.
7. Equivalence.
A Simple Comparison of Two Proposals.
Simple Equivalence.
Equivalence with Varying Cash-Flow Instances.
Equivalence Under Different Interest Rates.
Summary.
Self-Study Questions.
8. Bases for Comparison.
Comparing Cash-Flow Streams.
A Simple Example.
Present Worth, PW(i).
Future Worth, FW(i).
Annual Equivalent, AE(i).
Internal Rate of Return, IRR.
Payback Period.
Project Balance, PB(i).
Capitalized Equivalent Amount, CE(i).
Summary.
Self-Study Questions.
9. Developing Mutually Exclusive Alternatives.
Relationships Between Proposals.
Alternatives.
Developing Mutually Exclusive Alternatives.
The "Do Nothing" Alternative.
Example Proposals.
Summary.
Self-Study Questions.
II. Making For-profit Business Decisions.
10. For-Profit Decision Analysis.
Minimum Attractive Rate of Return (MARR).
Before- and After-Tax MARRs.
The Basic For-Profit Decision Process.
Decisions Based on Total Versus Differential Cash-Flow Streams.
Present Worth on Incremental Investment.
IRR on Incremental Investment.
Comparisons Based on Total Cash-Flow Streams.
Rank on Rate of Return.
Summary.
Self-Study Questions.
11. Planning Horizons and Economic Life.
Planning Horizons.
Capital Recovery with Return, CR(i).
Economic Life.
Finding the Economic Life of an Asset.
Special Cases in Economic Life.
Economic Lives and Planning Horizons.
Summary.
Self-Study Questions.
12. Replacement and Retirement Decisions.
Replacement Decisions.
Sunk Cost and Salvage Value, Special Issues in Replacement Decisions.
The Outsider's Viewpoint: Addressing Sunk Cost and Salvage Value.
An Example of Replacement Analysis.
Retirement Decisions.
Summary.
Self-Study Questions.
III. Advanced For-profit Decision Techniques.
13. Inflation and Deflation.
Inflation and Deflation.
Price Indices: Measuring Inflation and Deflation.
Popular Price Indices.
The Inflation Rate.
Purchasing Power and Inflation.
Accounting for Inflation.
Actual Dollar Versus Constant Dollar Analysis.
Mr. Kinkaid's Adventure in Actual and Constant Dollars.
Planning a Retirement.
Summary.
Self-Study Questions.
14. Depreciation.
Introduction to Depreciation.
Actual Depreciation.
Depreciation Accounting.
Value-Time Functions.
Book Value.
Depreciation Methods.
Depreciation Methods Before 1981.
Declining-Balance Depreciation.
Accelerated Cost Recovery System (ACRS), 1981-1986.
Modified Accelerated Cost Recovery System - (MACRS), 1987 and Later.
Units-of-Production Depreciation.
Depletion.
Other Aspects of Depreciation Accounting Not Discussed Here.
Summary.
Self-Study Questions.
15. General Accounting and Cost Accounting.
General Accounting.
Cost Accounting.
Determining Unit Cost.
Summary.
Self-Study Questions.
16. Income Taxes and After-Tax Cash-Flow Streams.
What Are Taxes?
Federal Income Taxes for Corporations.
Federal Income Taxes for Individuals.
Effective Income Tax Rates.
Calculating After-Tax Cash-Flow Streams.
Tax Credits.
Inflation and After-Tax Cash-Flow Streams.
Summary.
Self-Study Questions.
17. The Consequences of Income Taxes onBusiness Decisions.
Interest Expenses and Income Taxes.
Interest Income and Income Taxes.
Depreciation Method and Income Taxes.
Depreciation Recovery Period and Income Taxes.
Capital Gains and Losses for Corporations.
Gain or Loss When Selling or Scrapping Depreciable Assets.
Comparing Financing Methods in After-Tax Cash-Flow Terms.
After-Tax Analysis of Replacements.
Summary.
Self-Study Questions.
IV. Making Decisions in Government and Nonprofit Organizations.
18. Making Not-for-Profit Business Decisions.
Software and Governments.
Software and Nonprofit Organizations.
Decision Analysis in Government and Nonprofit Organizations.
Benefit-Cost Analysis for a Single Proposal.
Benefit-Cost Analysis for Multiple Proposals.
Cost-Effectiveness Analysis.
Summary.
Self-Study Questions.
V. Present Economy.
19. Break-Even Analysis.
Decision Variables and Objective Functions.
Break-Even Analysis with Two Alternatives.
Break-Even Analysis with Three Alternatives.
General Case Break-Even Analysis.
Summary.
Self-Study Questions.
20. Optimization Analysis.
Introducing Optimization.
Optimizing a Single Alternative with a Single Decision Variable.
Optimizing Multiple Alternatives with a Single Decision Variable.
Optimizing a Single Alternative with Multiple Decision Variables.
Optimizing Multiple Alternatives with Multiple Decision Variables.
Summary.
Self-Study Questions.
VI. Estimation, Risk, and Uncertainty.
21. Basic Estimation Concepts.
What Is an Estimate?
Why Estimate?
Estimates and Probabilities.
Estimates and Uncertainty.
The Cone of Uncertainty: Uncertainties Change over Time.
Expressing Estimate Uncertainty.
The Cone of Uncertainty in Light of a Fixed Schedule.
Summary.
Self-Study Questions.
22. General Estimation Techniques.
Expert Judgment Estimation.
Estimation by Analogy.
Bottom-Up Estimation.
Estimation by Statistical Methods.
Estimating by Multiple Methods.
Make Assumptions Explicit.
Summary.
Self-Study Questions.
23. Allowing for Inaccuracy in Estimates.
Knowledge Drives Estimation Accuracy.
Allowing for Inaccuracy in Estimates.
Allowing for Inaccuracy Using Conservative Decision Criteria.
More Effective Strategies.
Considering Ranges of Estimates.
Sensitivity Analysis.
Delay Final Decisions.
Summary.
Self-Study Questions.
24. Decision Making Under Risk.
Expected Value Decision Making.
Expectation Variance in Decision Making.
Monte Carlo Analysis.
Decision Trees.
The Expected Value of Perfect Information.
Summary.
Self-Study Questions.
25. Decision Making Under Uncertainty.
The Payoff Matrix.
The Laplace Rule.
The Maximin Rule.
The Maximax Rule.
The Hurwicz Rule.
The Minimax Regret Rule.
Summary of the Decision Rules.
Summary.
Self-Study Questions.
VII. Multiple-Attribute Decisions.
26. Decisions Based on Multiple Attributes.
Different Kinds of "Value".
Choosing the Attributes.
Selecting Measurement Scales.
Dimensionality of the Decision Techniques.
Noncompensatory Decision Techniques.
Compensatory Decision Techniques.
Summary.
Self-Study Questions.
VIII. Summary.
27. Closing Remarks.
A Review of the Book.
The Primary Message.
A Secondary Message: Software Engineering Versus Computer Science.
Summary.
Self-Study Questions.
Appendix A. Software Project Work Breakdown Structures.
Appendix B. Interest Tables.
Appendix C. Linear Interpolation.
Appendix D. Derivatives.
Appendix E. Introduction to Probability and Statistics.
Appendix F. Answers to Selected Self-Study Questions.
Appendix G. Glossary.
References.
Index.
Preface.
I. Introduction and Foundations.
1. Return on Software: Maximizing the Return on Your Software Investment.
Software on Purpose.
Waste Not, Want Not.
The Primary Message.
A Secondary Message: Software Engineering Versus Computer Science.
An Overview of the Book.
Summary.
Self-Study Questions.
2. Business on Purpose.
Why Are Companies in Business, Anyway?
Business Decisions in For-Profit Organizations.
Business Decisions in Not-for-Profit Organizations.
Business Decisions in Your Own Personal Finances.
Summary.
Self-Study Questions.
3. The Fundamental Concepts of Business Decisions.
Proposals.
Cash-Flow Instances and Cash-Flow Streams.
Cash-Flow Diagrams.
Developing Cash-Flow Streams.
Summary.
Self-Study Questions.
4. The Business Decision-Making Process.
Introducing the Business Decision-Making Process.
Understand the Real Problem.
Define the Selection Criteria.
Identify All Reasonable Technically Feasible Solutions (the Proposals).
Evaluate Each Proposal Against the Selection Criteria.
Select the Preferred Proposal.
Monitor the Performance of the Selected Proposal.
Summary.
Self-Study Questions.
5. Interest: The Time Value of Money.
Time Is Money.
Interest.
Naming Conventions in Interest Formulas.
Simple Interest.
Discrete Compounding of Interest.
Single-Payment Compound-Amount (F/P).
Single-Payment Present-Worth (P/F).
Equal-Payment-Series Compound-Amount (F/A).
Equal-Payment-Series Sinking-Fund (A/F).
Equal-Payment-Series Capital-Recovery (A/P).
Equal-Payment-Series Present-Worth (P/A).
Summarizing the Formulas.
Some Other Handy Relationships.
Summary.
Self-Study Questions.
6. Other Interest(ing) Calculations.
Using Different Interest Periods and Compounding Frequencies.
The Relationship Between Cash-Flow Instances and Compounding Interval.
Continuous Compounding, Discrete Payment.
Determining Actual Interest Rates.
Paying off a Loan Through a Single, Lump-Sum Payment.
Separating Interest and Principal in Loan Payments.
Paying Off a Loan Early Through Higher Payments.
Interest Rates Might Not Be What They Seem.
Summary.
Self-Study Questions.
7. Equivalence.
A Simple Comparison of Two Proposals.
Simple Equivalence.
Equivalence with Varying Cash-Flow Instances.
Equivalence Under Different Interest Rates.
Summary.
Self-Study Questions.
8. Bases for Comparison.
Comparing Cash-Flow Streams.
A Simple Example.
Present Worth, PW(i).
Future Worth, FW(i).
Annual Equivalent, AE(i).
Internal Rate of Return, IRR.
Payback Period.
Project Balance, PB(i).
Capitalized Equivalent Amount, CE(i).
Summary.
Self-Study Questions.
9. Developing Mutually Exclusive Alternatives.
Relationships Between Proposals.
Alternatives.
Developing Mutually Exclusive Alternatives.
The "Do Nothing" Alternative.
Example Proposals.
Summary.
Self-Study Questions.
II. Making For-profit Business Decisions.
10. For-Profit Decision Analysis.
Minimum Attractive Rate of Return (MARR).
Before- and After-Tax MARRs.
The Basic For-Profit Decision Process.
Decisions Based on Total Versus Differential Cash-Flow Streams.
Present Worth on Incremental Investment.
IRR on Incremental Investment.
Comparisons Based on Total Cash-Flow Streams.
Rank on Rate of Return.
Summary.
Self-Study Questions.
11. Planning Horizons and Economic Life.
Planning Horizons.
Capital Recovery with Return, CR(i).
Economic Life.
Finding the Economic Life of an Asset.
Special Cases in Economic Life.
Economic Lives and Planning Horizons.
Summary.
Self-Study Questions.
12. Replacement and Retirement Decisions.
Replacement Decisions.
Sunk Cost and Salvage Value, Special Issues in Replacement Decisions.
The Outsider's Viewpoint: Addressing Sunk Cost and Salvage Value.
An Example of Replacement Analysis.
Retirement Decisions.
Summary.
Self-Study Questions.
III. Advanced For-profit Decision Techniques.
13. Inflation and Deflation.
Inflation and Deflation.
Price Indices: Measuring Inflation and Deflation.
Popular Price Indices.
The Inflation Rate.
Purchasing Power and Inflation.
Accounting for Inflation.
Actual Dollar Versus Constant Dollar Analysis.
Mr. Kinkaid's Adventure in Actual and Constant Dollars.
Planning a Retirement.
Summary.
Self-Study Questions.
14. Depreciation.
Introduction to Depreciation.
Actual Depreciation.
Depreciation Accounting.
Value-Time Functions.
Book Value.
Depreciation Methods.
Depreciation Methods Before 1981.
Declining-Balance Depreciation.
Accelerated Cost Recovery System (ACRS), 1981-1986.
Modified Accelerated Cost Recovery System - (MACRS), 1987 and Later.
Units-of-Production Depreciation.
Depletion.
Other Aspects of Depreciation Accounting Not Discussed Here.
Summary.
Self-Study Questions.
15. General Accounting and Cost Accounting.
General Accounting.
Cost Accounting.
Determining Unit Cost.
Summary.
Self-Study Questions.
16. Income Taxes and After-Tax Cash-Flow Streams.
What Are Taxes?
Federal Income Taxes for Corporations.
Federal Income Taxes for Individuals.
Effective Income Tax Rates.
Calculating After-Tax Cash-Flow Streams.
Tax Credits.
Inflation and After-Tax Cash-Flow Streams.
Summary.
Self-Study Questions.
17. The Consequences of Income Taxes onBusiness Decisions.
Interest Expenses and Income Taxes.
Interest Income and Income Taxes.
Depreciation Method and Income Taxes.
Depreciation Recovery Period and Income Taxes.
Capital Gains and Losses for Corporations.
Gain or Loss When Selling or Scrapping Depreciable Assets.
Comparing Financing Methods in After-Tax Cash-Flow Terms.
After-Tax Analysis of Replacements.
Summary.
Self-Study Questions.
IV. Making Decisions in Government and Nonprofit Organizations.
18. Making Not-for-Profit Business Decisions.
Software and Governments.
Software and Nonprofit Organizations.
Decision Analysis in Government and Nonprofit Organizations.
Benefit-Cost Analysis for a Single Proposal.
Benefit-Cost Analysis for Multiple Proposals.
Cost-Effectiveness Analysis.
Summary.
Self-Study Questions.
V. Present Economy.
19. Break-Even Analysis.
Decision Variables and Objective Functions.
Break-Even Analysis with Two Alternatives.
Break-Even Analysis with Three Alternatives.
General Case Break-Even Analysis.
Summary.
Self-Study Questions.
20. Optimization Analysis.
Introducing Optimization.
Optimizing a Single Alternative with a Single Decision Variable.
Optimizing Multiple Alternatives with a Single Decision Variable.
Optimizing a Single Alternative with Multiple Decision Variables.
Optimizing Multiple Alternatives with Multiple Decision Variables.
Summary.
Self-Study Questions.
VI. Estimation, Risk, and Uncertainty.
21. Basic Estimation Concepts.
What Is an Estimate?
Why Estimate?
Estimates and Probabilities.
Estimates and Uncertainty.
The Cone of Uncertainty: Uncertainties Change over Time.
Expressing Estimate Uncertainty.
The Cone of Uncertainty in Light of a Fixed Schedule.
Summary.
Self-Study Questions.
22. General Estimation Techniques.
Expert Judgment Estimation.
Estimation by Analogy.
Bottom-Up Estimation.
Estimation by Statistical Methods.
Estimating by Multiple Methods.
Make Assumptions Explicit.
Summary.
Self-Study Questions.
23. Allowing for Inaccuracy in Estimates.
Knowledge Drives Estimation Accuracy.
Allowing for Inaccuracy in Estimates.
Allowing for Inaccuracy Using Conservative Decision Criteria.
More Effective Strategies.
Considering Ranges of Estimates.
Sensitivity Analysis.
Delay Final Decisions.
Summary.
Self-Study Questions.
24. Decision Making Under Risk.
Expected Value Decision Making.
Expectation Variance in Decision Making.
Monte Carlo Analysis.
Decision Trees.
The Expected Value of Perfect Information.
Summary.
Self-Study Questions.
25. Decision Making Under Uncertainty.
The Payoff Matrix.
The Laplace Rule.
The Maximin Rule.
The Maximax Rule.
The Hurwicz Rule.
The Minimax Regret Rule.
Summary of the Decision Rules.
Summary.
Self-Study Questions.
VII. Multiple-Attribute Decisions.
26. Decisions Based on Multiple Attributes.
Different Kinds of "Value".
Choosing the Attributes.
Selecting Measurement Scales.
Dimensionality of the Decision Techniques.
Noncompensatory Decision Techniques.
Compensatory Decision Techniques.
Summary.
Self-Study Questions.
VIII. Summary.
27. Closing Remarks.
A Review of the Book.
The Primary Message.
A Secondary Message: Software Engineering Versus Computer Science.
Summary.
Self-Study Questions.
Appendix A. Software Project Work Breakdown Structures.
Appendix B. Interest Tables.
Appendix C. Linear Interpolation.
Appendix D. Derivatives.
Appendix E. Introduction to Probability and Statistics.
Appendix F. Answers to Selected Self-Study Questions.
Appendix G. Glossary.
References.
Index.