Del Sol Healthcare is considering two capital investment proposals. The informat

Question

Del Sol Healthcare is considering two capital investment proposals. The information for both projects is listed below:

Proposal #1

Proposal #2

Cost of the investment

$250,000

$300,000

Estimated salvage value

$25,000

$30,000

Average estimated net income

$50,000

$60,000

Calculate the return on average investment for both proposals and discuss which one would be the best option for investment.

Proposal #1

Proposal #2

Cost of the investment

$250,000

$300,000

Estimated salvage value

$25,000

$30,000

Average estimated net income

$50,000

$60,000

Explanation / Answer

Answer: Return on average investment:(Average estimated Net income/Investment)*100

Proposal #1:

=($50000/($250000-$25000))*100=22.22%

Proposal #2:

=($60000/($300000-$30000))*100=22.22%

Since Return on average investment is equal in both proposal and average estimated net income is higher in proposal #2 so it is best option.

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