You have $100 in cash. Which metric should you measure to determine the best use of the cash?

• A. Return on capital
• B. Net present value
• C. Internal rate of return
• D. Payback period

Answer: (A)

When you have a fixed amount of cash to deploy, the best use is the option that turns into the most profit per dollar invested. Return on capital (return on invested capital) measures exactly that: how efficiently each dollar of capital is converted into earnings. It normalizes for different cash requirements across opportunities, so you can compare options on a level playing field.

Net present value looks at total value created in today’s dollars but can favor larger or longer projects simply because they have bigger absolute cash flows, even if they’re less efficient per dollar. Internal rate of return can be misleading when comparing projects of different sizes or lifetimes, since a higher IRR doesn’t always mean greater value created. Payback period ignores any profits earned after the initial recovery and also ignores the time value of money.

So, to judge the best use of the cash, you focus on the option with the highest return on capital.