Sharkeys 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. Sharkey has gathered the following information about the slide:

1. Water slide equipment could be purchased and installed at a cost of $120,000. According to the manufacturer, the slide would be usable for 12 years, after which it would have no salvage value.
2. 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 $30,000 to an amusement park in a nearby city.
4. Sharkey has concluded that about 20,000 more people would use the water slide each year than have been using the rides. The admission price would be $2.80 per person (the same price that the Fun Centre has been charging for the rides).
5. On the basis of experience at other water slides, Sharkey estimates that incremental operating expenses each year for the slide would be as follows: salaries, $24,500; insurance, $1,200; utilities, $3,700; maintenance, $2,875.

Required:

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

2-a. Compute the SRR expected from the water slide.

2-b. On the basis of this computation, would the water slide be constructed if Sharkey requires an SRR of at least 14% on all investments?

multiple choice 1

Yes

No

3-a. Compute the payback period for the water slide. (Round your answer to 2 decimal places.)

3-b. If Sharkey requires a payback period of five years or less, should the water slide be constructed?

multiple choice 2

Yes

No