Thank you for taking our Weekly Pop Quiz!

CMA Pop Quiz #147: Part II: Investment Decisions

Here is the answer to this week’s quiz:


  • 2.58 years.
  • 2.14 years.
  • 2.44 years.
  • 3.41 years.
Correct Answer B

The payback is the length of time that it takes to recover the initial investment. The cash flow in each year is calculated as follows: Cash flow each year = (operating income)(1 − tax rate) + (annual depreciation expense)

Depreciation expense = $400,000 / 5 years = $80,000 per year
Cash flow each year = (operating income)(1 − 0.4) + ($80,000)

Cash flow, year 1 = ($150,000)(0.6) + $80,000 = $170,000

Cash flow, year 2 = ($200,000)(0.6) + $80,000 = $200,000

Cash flow, year 3 = ($225,000)(0.6) + $80,000 = $215,000

Cumulative cash flow after 2 years = $170,000 + $200,000 = $370,000
Cumulative cash flow after 3 years = $370,000 + $215,000 = $585,000
Payback is 2 years + ($400,000 − $370,000) / ($215,000) = 2 + $30,000 / $215,000 = 2 years + 0.14 years = 2.14 years.


We hope you found this week’s quiz helpful. These questions are just a small sample of what you will find in Wiley CMAexcel’s test-prep products. If you haven’t already done so, Sign Up to receive our free pop quizzes every week via email.

The Wiley CMAexcel Learning System is the only test-prep system licensed by IMA, and provides full textbooks plus the industry-leading online Test Bank. Learn More Today.