In: Accounting
Sharkey’s Fun Center contains a number of electronic games as
well as a miniature golf course...
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 $330,000. 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 $92,000 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 $3.70 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, $82,000; insurance, $4,500; utilities, $13,300;
and maintenance, $10,100.
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 14% 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?