Sharkey's Fun Center is considering building a water slide for its customers and gathered the following information:
a. The water slide would cost
$330,000
, have a 12 -year useful life with no salvage value and be depreciated using the straight-line method.
b. 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 a nearby amusement park.
c. The water slide would attract 50,000 more customers per year who each pay the company's usual admission price of
$3.60
per person.
d. The water slides' annual incremental operating expenses would be salaries,
$85,000
; insurance,
$4,200
; utilities,
$13,000
; and maintenance, $9,800.
Required:
Prepare an income statement showing the water slides' expected annual net operating income.
2-a. Compute the water slides' simple rate of return.
2-b. Would the company purchase the water slide if it requires a simple rate of return of at least
14%
?
3-a. Compute the water slides' payback period.
3-b. Would the company purchase the water slide if it requires a payback period of five years or less?