Sharkey\'s Fun Center contains a number of electronic games as well as a miniatu

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. 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.

2. Compute the simple 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 investments?

Explanation / Answer

Amount (in $) Particulars Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Total Cost of water slide equipment 330000.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 330000.00 Revenue from rides dismantled 60000.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 60000.00 Net Cost 270000.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 270000.00 Annual Incremental Operating Expenses Salaries 85000.00 85000.00 85000.00 85000.00 85000.00 85000.00 85000.00 85000.00 85000.00 85000.00 85000.00 85000.00 1020000.00 Insurance 4200.00 4200.00 4200.00 4200.00 4200.00 4200.00 4200.00 4200.00 4200.00 4200.00 4200.00 4200.00 50400.00 Utilities 13000.00 13000.00 13000.00 13000.00 13000.00 13000.00 13000.00 13000.00 13000.00 13000.00 13000.00 13000.00 156000.00 Maintenance 9800.00 9800.00 9800.00 9800.00 9800.00 9800.00 9800.00 9800.00 9800.00 9800.00 9800.00 9800.00 117600.00 Total Annual Operating Expenses 112000.00 112000.00 112000.00 112000.00 112000.00 112000.00 112000.00 112000.00 112000.00 112000.00 112000.00 112000.00 1344000.00 No. of Additional People Visiting 50000.00 50000.00 50000.00 50000.00 50000.00 50000.00 50000.00 50000.00 50000.00 50000.00 50000.00 50000.00 600000.00 Admission Price 3.60 3.60 3.60 3.60 3.60 3.60 3.60 3.60 3.60 3.60 3.60 3.60 Additional Revenue 180000.00 180000.00 180000.00 180000.00 180000.00 180000.00 180000.00 180000.00 180000.00 180000.00 180000.00 180000.00 2160000.00 Profit per year 68000.00 68000.00 68000.00 68000.00 68000.00 68000.00 68000.00 68000.00 68000.00 68000.00 68000.00 68000.00 816000.00 The Payback period for the water slide is The Profit generated each year after meeting expenses 68000.00 The cost of $270000.00 will be recovered in ($270000/$68000) years 3.97 years Thus the water slide should be constructed.

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