Response to the following problem:
Water World Inc. is considering purchasing a water park in San Antonio, Texas, for $1,850,000. The new facility will generate annual net cash inflows of $520,000 for eight years. Engineers estimate that the facility will remain useful for eight years and have no residual value. The company uses straight-line depreciation, and its stockholders demand an annual return of 12% on investments of this nature.
Required:
1. Compute the payback period, the accounting rate of return, and the net present value of this investment.
2. Make a recommendation whether the company should invest in this project.