INF3708/301/0/2023

Tutorial Letter 301/0/2023

Software Project Management

INF3708

Year Module(s)

DEPARTMENT OF INFORMATION SYSTEMS

IMPORTANT INFORMATION
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make sure that you have regular access to the myUnisa module
website, INF3708-23-Y, as well as your group website.

Note: This is a fully online module. It is, therefore, only available on myUnisa.

BARCODE
 CONTENTS

Page
1. Introduction ................................................................................................................................. 3
2. Payback period ........................................................................................................................... 3
2.1. Step 1: Calculate the annual cumulative cash flow .................................................................. 4
2.2. Step 2: Calculating the payback period .................................................................................... 4
3. Other questions that might be unclear ...................................................................................... 6
3.1. Return on investment ................................................................................................................. 6
3.2. Activity-on-node diagram ........................................................................................................... 7
4. Sources consulted ...................................................................................................................... 7
5. In closing ..................................................................................................................................... 7

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1. Introduction
Greetings fellow students! This is Tutorial 301. In this tutorial, I respond to errors concerning
questions about the payback period in Assessment 2. Numerous INF3708 enrolees have
reported that something is not quite right with the payback period. In response and under the
(mistaken) perception that these students are not applying the payback period formula correctly,
I would instruct them to find at least two different formulas to calculate the payback period to
determine if these formulas produce the same result. If my response seems dismissive, I
apologise, as it was not my intention to appear dismissive. Examiners are confident that their
quiz questions and associated answers are correct because assessments are moderated.
However, both the moderator and the examiner can be wrong.

In what follows, I explain the steps that led to the erroneous payback period and the corrective
actions I applied. In addition, I shed light on other questions that seem vague. Finally, you
cannot be penalised for an examiner’s error; in the final section, I explain the corrective
measures I applied. This tutorial letter draws on Schwalbe (2019) and the Indeed Editorial Team
(2023).

2. Payback period
Payback period is the length of time it takes to recover investment cost. I pose the following
question to you:

Study the cash flow of Project Y in the table below (see Table 1). Calculate the payback period.

Table 1. Project Y

Year Project Y

0 -R200 000,00

1 R70 000,00

2 R75 000,00

3 R80 000,00

4 R85 000,00

I used (and perhaps over-relied on) Microsoft Excel to ensure the accuracy of my calculation.
Below, I reveal how the error emerged.

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2.1. Step 1: Calculate the annual cumulative cash flow
To calculate the annual cumulative cash flow of YEAR 1, you add the cash flow amount of
YEAR 1 to the initial investment of R200 000 (YEAR 0), which produces an answer of -
R115 000. Subsequent annual cash flows (YEARS 2–4) are calculated by adding the
cumulative cash flow of the previous years to the cash flow of the current year. Figure 1
illustrates how the Excel formula has been applied.

Figure 1. Excel formulas to calculate annual cumulative cash flow

The Excel formulas applied in Figure 1 produce the cumulative cash flow as illustrated in Figure
2.

Figure 2. The annual cumulative cash flow is displayed in column C.

2.2. Step 2: Calculating the payback period

The formula to calculate the payback period is as follows:

Payback period = A + (B / C).

• A: the last year with a negative cash flow.

• B: cumulative cash flow at the end of that year.

• C: cash flow during the following year.

This formula, directly transferred to MS Excel, looks as follows (see cell B8 in Figure 3):
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Figure 3. Payback period formula applied in MS Excel

The Excel formula applied in Figure 3 produces the result shown in cell B8 of Figure 4:

Figure 4. The Excel formula produces a payback period of 1.4 years.

The purported payback period of 1.4 years is incorrect. This incorrect value was produced
because Excel, when applying the provided payback period formula directly, computes the
subtraction symbol that precedes the cumulative cash flow of YEAR 2 (i.e. -R45 000). Indeed,
the subtraction symbol should not be calculated, but must simply serve as visual illustration that
YEAR 2 is the last year with a negative cash flow. In this regard, it is also worth noting that the
negative values still represent inflow of cash. Therefore, the calculation must be as follows:

Payback period = the last year with negative cash flow + (cumulative cash flow at the end
of that year / cash flow during the following year)

Payback period = 2 + (R45 000,00/R78 000,00) = 2,6 years

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Since Excel does not omit the subtraction value, the payback formula applied in Excel must be
adjusted as follows (see cell B8 in Figure 5):

Figure 5. The payback period formula adjusted for MS Excel

Note that the addition symbol that follows the YEAR has been replaced by a subtraction symbol
to cancel out the subtraction symbol that preceded the cumulative cash flow of that year. The
Excel formula applied in Figure 5 produces the correct payback period that is shown in cell B8
of Figure 6:

Figure 6. 2,6 years is the correct payback period

3. Other questions that might be unclear

3.1. Return on investment
I asked three questions that focus on return on investment (ROI). Two of the questions focus on
calculating the ROI that involves total investment cost and annual profit; you can apply the
generic ROI formula with concern to these two questions. One question focusses on calculating
ROI first requires you to calculate total discounted revenue and total discounted expenses. You

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can use the ROI formula for multiyear projects in this instance. In structuring the questions,
some information is left out intentionally because it is expected of third-year-level students to fill
in the blanks (make strong assumptions).

3.2. Activity-on-node diagram

Confusion regarding questions that focus on the activity-on-node diagram stems from the table
that indicates that Activity L is preceded by Activities I and J, but Activity L on the diagram is
preceded by Activities H and I. The discrepant predecessors can be an error but can also be
representative of alternative timelines. Calculate the early start (ES), early finish (ES), late start
(LS), and late finish (LF) of both timelines to determine which ES, EF, LS, and LF matches one
of the four options presented in the quiz.

4. Sources consulted
• Indeed Editorial Team. (2023). How to calculate a payback period (formulas and examples).
Retrieved from Indeed website: https://www.indeed.com/career-advice/career-
development/how-to-calculate-payback-period-formula

• Schwalbe, K. (2019). Information technology project management (9th ed.). Boston, USA:
Cengage Learning.

5. In closing
I dedicate this tutorial letter to the students who contacted me about the erroneous payback
period question. I applaud your search for the correct and relevant knowledge. Students will not
be penalised for the two questions that focus on the payback period. I configured the two quiz
questions about payback period, to accept any of the four options presented as correct. This
method prevents 2 marks from being deducted from the total quiz score; however, if you skip
the question for any reason, you will not receive a mark.

Thank you and best wishes,

Emil Arthur van der Poll

PhD student: Information Systems
School of Computing
vdpolae@unisa.ac.za
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