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:
Required:
1. 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 12% 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?
1 | Income statement | |||||||
$ | $ | |||||||
Incremental revenue | (50000*4.90) | 245000 | ||||||
Less:Incremental operating expenses | ||||||||
Salaries | 94000 | |||||||
Insurance | 5700 | |||||||
Utilities | 14500 | |||||||
Maintenance | 11300 | |||||||
Depreciation | (510000/12) | 42500 | 168000 | |||||
Net operating income | 77000 | |||||||
2-a. | Simple rate of return=Net operating income/Initial investment cost=77000/510000=0.15098=15.10% | |||||||
2-b. | Yes. | |||||||
Since it has a simple rate of return of 15.10% which is more than required return of 12% | ||||||||
3-a. | Payback period=Initial investment cost/Annual cash inflow | |||||||
Annual cash inflow=Net operating income+Depreciation=77000+42500=$ 119500 | ||||||||
Payback period=510000/119500=4.27 years | ||||||||
3-b. | Yes | |||||||
Since the payback period of 4.27 years is within the acceptable payback period of 5 years | ||||||||
Sharkey’s Fun Center contains a number of electronic games as well as a miniature golf course...
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 $345,000. According to the manufacturer, the slide would be usable for 12 years after which it would have...
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