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. The 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 then have been using the rides. The admission price would be $3.60 per person (the same pricethat the Fun Center has been charging for the old rides.

e. Base 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.

1. Prepare an income statement showing the expected net operating income each year from the water slide.

Ticket Revenue

Less operating expenses

Salaries

Insurance

Utilities

Depreciation

Maintenance

Total operating expenses

Net operating income

2. Compute the simples 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 investment?

3. Compute the payback period for the water slide. If Mr. Sharkey accepts any project with a pay-
back of five year or less, would the water slide be constructed?