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

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:

Water slide equipment could be purchased and installed at a cost of $300,000. According to the manufacturer, the slide would be usable for 12 years after which it would have no salvage value.

Mr. Sharkey would use straight-line depreciation on the slide equipment.

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 $86,500 to an amusement park in a nearby city.

Mr. Sharkey 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 $3.50 per person (the same price that the Fun Center has been charging for the old rides).

Based on experience at other water slides, Mr. Sharkey estimates that annual incremental operating expenses for the slide would be: salaries, $80,000; insurance, $4,300; utilities, $13,100; and maintenance, $9,900.

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

        

        

Will the water slide be constructed if Mr. Sharkey requires a simple rate of return of at least 12% on all investments?

      

        

If Mr. Sharkey accepts any project with a payback period of five years or less, would the water slide be constructed?

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:

Explanation / Answer

1.

Note:Sales value of old slides i.e. $86500 are not considered as revenue for calculation each year net operating income as this is aone time revenue and shall nor reoccur in future.

2. a . Simple rate of return = 42700 / 175000 * 100 = 24.40%

2. b Yes

3 a. Payback period = Initial Investment / Annual Cash inflow = 300000 - 86500 / 175000 = 1.22 years.

Sale price of old slides shall reduce the current initial investment.

3 b Yes

Particulars Amt ($) Incremental Revenue ($3.50 * 50000) 175000 Less : Operating Expenses (80000+4300+13100+9900) 107300 Less : Depreciation (300000/12) 25000 Net Incremental Income each year 42700

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