P10–13 Simple rate of return; payback Time allowed: 30 minutes Sharkey’s Fun Centre 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:

1 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.

2 Mr Sharkey would use straight-line depreciation on the slide equipment.

3 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.
4 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 Centre has been charging for the rides).
5 Based on experience at other water slides, Mr Sharkey estimates that incremental operating expenses each year for the slide would be: salaries, £85,000; insurance, £4,200; utilities, £13,000; and maintenance, £9,800.
Required 1 Prepare a profit statement showing the expected profit each year from the water slide.
2 Compute the simple rate of return expected from the water slide. Based on this computation, should 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 requires a payback period of five years or less, would the water slide be constructed?