You are the business analyst for your organization and are trying to determine the best solution for an identified problem. You have determined that you could create a software solution using inhouse resources for
$65,000 and with an ongoing support of $5,600 per month. A vendor offers you a quote that they can create the software for $49,000 with an ongoing support of $6,100 per month.
Which solution should you choose?
Correct Answer: A
Explanation
To compare the two solutions, we need to calculate the total cost of ownership (TCO) for each option over a given period of time. The TCO includes both the initial investment and the ongoing support costs. The formula for TCO is:
TCO=I+(S×T)
whereIis the initial investment,Sis the monthly support cost, andTis the number of months.
For the inhouse solution, the TCO is:
TCOinhouse=65,000+(5,600×T)
For the vendor solution, the TCO is:
TCOvendor=49,000+(6,100×T)
To find the breakeven point, we need to set the two TCOs equal to each other and solve forT:
65,000+(5,600×T)=49,000+(6,100×T)
Simplifying and rearranging, we get:
T=50016,000=32
This means that the two solutions have the same TCO after 32 months. Therefore, the inhouse solution is cheaper if the solution is used for less than 32 months, and the vendor solution is cheaper if the solution is used for more than 32 months. Hence, the correct answer is A.References:BABOK Guide, p. 97-98;Certified BusinessAnalysis Professional (CBAP) | Coursera, Course 2, Week 3, Video: "Financial Analysis Techniques"