Required: 1. Prepare an income statement showing the expected net operating income each year from the water slide. 2-a. Compute the simple rate of return expected from the water slide. 2-b. Based on the above computation, would the water slide be constructed if Mr. Sharkey requires a simple rate of return of at least 12% on all investments? 3-a. Compute the payback period for the water slide. 3-b. If Mr. Sharkey accepts any project with a payback period of five years or less, would the water slide be constructed?
Sharkey’s Fun Center contains a number of electronic games as well as a miniature golf course and various rides located outside the building. Paul Sharkey, the owner, would like to construct a water slide on one portion of his property. Mr. Sharkey gathered the following information about the slide:
- Water slide equipment could be purchased and installed at a cost of $345,000. According to the manufacturer, the slide would be usable for 12 years after which it would have no salvage value.
- Mr. Sharkey would use straight-line
depreciation on the slide equipment. - To make room for the water slide, several rides would be dismantled and sold. These rides are fully depreciated, but they could be sold for $117,500 to an amusement park in a nearby city.
- Mr. Sharkey concluded that about 50,000 more people would use the water slide each year than have been using the rides. The admission price would be $3.80 per person (the same price the Fun Center has been charging for the old rides).
- Based on experience at other water slides, Mr. Sharkey estimates that annual incremental operating expenses for the slide would be: salaries, $83,000; insurance, $4,600; utilities, $13,400; and maintenance, $10,200.
Required:
1. Prepare an income statement showing the expected net operating income each year from the water slide.
2-a. Compute the simple
2-b. Based on the above computation, would the water slide be constructed if Mr. Sharkey requires a simple rate of return of at least 12% on all investments?
3-a. Compute the payback period for the water slide.
3-b. If Mr. Sharkey accepts any project with a payback period of five years or less, would the water slide be constructed?
only 1, 2a and 3a
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