Sharkey’s Fun Center contains a number of electronic games as well as a miniature golf courseand various rides located outside the building. Paul Sharkey, the owner, would like to construct awater slide on one portion of his property. Mr. Sharkey has gathered the following information aboutthe slide:a. Water slide equipment could be purchased and installed at a cost of $330,000. According to themanufacturer, the slide would be usable for 12 years after which it would have no salvage value.b. Mr. Sharkey would use straight-line depreciation on the slide equipment.c. To make room for the water slide, several rides would be dismantled and sold. These rides are fullydepreciated, but they could be sold for $60,000 to an amusement park in a nearby city.d. Mr. Sharkey has concluded that about 50,000 more people would use the water slide each year thanhave been using the rides. The admission price would be $3.60 per person (the same price that the FunCenter has been charging for the old rides).e. Based on experience at other water slides, Mr. Sharkey estimates that annual incremental operating expenses for the slide would be: salaries, $85,000; insurance, $4,200; utilities, $13,000; andmaintenance, $9,800.Required:(Ignore income taxes.)1. Prepare an income statement showing the expected net operating income each year from the waterslide.2. Compute the simple rate of return expected from the water slide. Based on this computation, wouldthe water slide be constructed if Mr. Sharkey requires a simple rate of return of at least 14% on allinvestments?3. Compute the payback period for the water slide. If Mr. Sharkey accepts any project with a paybackperiod of five years or less, would the water slide be constructed?

Question

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 has gathered the following information about
the slide:
a. Water slide equipment could be purchased and installed at a cost of $330,000. According to the
manufacturer, the slide would be usable for 12 years after which it would have no salvage value.
b. Mr. Sharkey would use straight-line depreciation on the slide equipment.
c. 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 $60,000 to an amusement park in a nearby city.
d. Mr. Sharkey has 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 $3.60 per person (the same price that the Fun
Center has been charging for the old rides).
e. Based on experience at other water slides, Mr. Sharkey estimates that annual incremental operating expenses for the slide would be: salaries, $85,000; insurance, $4,200; utilities, $13,000; and
maintenance, $9,800.
Required:
(Ignore income taxes.)
1. Prepare an income statement showing the expected net operating income each year from the water
slide.
2. Compute the simple rate of return expected from the water slide. Based on this computation, would
the water slide be constructed if Mr. Sharkey requires a simple rate of return of at least 14% on all
investments?
3. Compute the payback period for the water slide. If Mr. Sharkey accepts any project with a payback
period of five years or less, would the water slide be constructed?

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