Sharkey’s Fun Center contains a number of electronic games, as well as a miniatu

ID: 2402612 • Letter: S

Question

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. Paul has gathered the following information about the slide:

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.

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.

Paul 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 Center has been charging for the rides).

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. Paul 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. Paul 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 $60,000 to an amusement park in a nearby city d. Paul 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) e. On the basis of experience at other water slides, Paul estimates that incremental operating expenses each year for the slide would be as follows: salaries, $85,000; insurance, $4,200; utilities, $13,000; maintenance, $9 800 Required: 1. Prepare an income statement showing the expected incremental net income each year from the water slide SHARKEY'S FUN CENTRE Incremental Income Statement Ticket revenue Deduct: Operating expenses Maintenance Utilities Salaries nsurance Depreciation Total operating expenses et income 2-a. Compute the SRR expected from the water slide Simple rate of return

Explanation / Answer

Ticket revenue (50,000 * $3.60)

$180,000

Deduct operating expenses:

Maintenance

???9,800

Utilities

$13,000

Salaries

$85,000

Insurance

$4,200

Depreciation (330,000 ÷ 12 )

$27,500

Total operating expenses

?139,500

Net income

$?40,500

2) a) Simple rate of return: 15%

Woking: 40,500 / (330,000 - 60,000) = 15%

b) Yes

Working: Yes, the water slide should be constructed because return is more than the specified hurdle rate of 14%.

3) a) Payback period: 3.97 years

Working: (330,000 - 60,000) / (40,500 + 27,500) = 3.97 years