Problem 12-26 Simple Rate of Return; Payback (LO12-1, LO12-6] 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: a. Water slide equipment could be purchased and installed at a cost of $495,000. 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 $122,250 to an amusement park in a nearby city. d. 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 $4.80 per person (the same price 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, $93,000; insurance, $5,600; utilities, $14,400; and maintenance, $11,200. 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 16% 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? Reg 1 Req 2A Req 2B Req Req 3B Prepare an income statement showing the expected net operating income each year from the water slide. Sharkey's Fun Center Income Statement Selling and administrative expenses: Total selling and administrative expenses Req 1 Req 2A Req 2B Req Req 3B Compute the simple rate of return expected from the water slide. Simple rate of return % Req 1 Req 2A Reg 2B Req Req 3B Based on the above computation, would the water slide be constructed if Mr. Sharkey requires a simple rate of return of at least 16% on all investments? Yes TO No Req 1 Req 2A Req 2B Req Req 3B Compute the payback period for the water slide. (Round your answer to 2 decimal places.) Payback period years Req 1 Reg 1 Reg za Reg BA Req 2A Reg 381 Req 28 Req 2B Req 3A Req 3B If Mr. Sharkey accepts any project with a payback period of five years or less, would the water slide be constructed? Yes ONO
