Certified Management Accountant Practice Exam 2026 - Free CMA Practice Questions and Study Guide

Question: 1 / 430

What is the purpose of the payback period in investment analysis?

To measure the total return on investment

To determine how long it will take to return the original investment

The payback period serves the specific purpose of determining how long it will take for an investment to generate enough cash flow to recover the initial investment cost. This metric is particularly useful for investors and managers as it provides a straightforward way to assess the liquidity and risk associated with an investment. A shorter payback period is generally preferred, as it indicates a quicker recovery of the initial outlay, which can be especially important in situations where cash flow is critical or when there is uncertainty in future cash flows.

It does not measure the total return on investment, assess the time value of money, or calculate the profitability index, which are the functions of other metrics in financial analysis. Instead, it focuses exclusively on the time aspect of cash flows, making it an effective tool for evaluating the risk and viability of investment opportunities.

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To assess the time value of money

To calculate the profitability index of an investment

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