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 $$585,000.$ 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 $$160,000$ 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 $$5\mathrm{.}40$ 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, $$99,000$; insurance, $$6,200$; utilities, $$15,000$; and maintenance, $$11,800.$

Required:

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?