On April 14, 2015, about 1345 Hawaiian standard time, a Cessna 172M, N12842, experienced a loss of engine power during initial climb from Hilo International Airport (ITO), Hilo, Hawaii. The certified flight instructor, the student pilot undergoing instruction (PUI), and one passenger sustained serious injuries. The airplane was substantially damaged during the forced landing on the grassy area near the departure end of the runway. Hawaii Flight Academy was operating the airplane under the provisions of 14 Code of Federal Regulations (CFR) Part 91. The local instructional flight departed Hilo about 1245. Visual meteorological conditions prevailed, and no flight plan had been filed.The operator reported that the FI was instructing the student pilot in preparation for his private pilot practical examination. The passenger was another student pilot who was observing the training flight. The flight crew reported that they had drained water out of the fuel tanks prior to the flight. The flight departed and flew for about 1 hour before returning to ITO to practice touch-and-go landings. The flight instructor instructed the student to perform a no flap "slip to landing" and go-around. After the aggressive slip and landing, power was applied for the takeoff. The airplane became airborne and when about 75-100 feet above ground, the engine began to run irregular and subsequently lost power. The FI took control of the airplane and executed a left turn away from buildings, which were located at the end of the runway. The airplane impacted onto the grass area northeast of the departure end of runway 03. During an examination of the airplane, about 8 ounces of fluid was drained from the fuel sump strainer, and 5 ounces of the fluid appeared to be water. The carburetor was removed from the engine and an unmeasured amount of fluid was drained from the carburetor; about 90% of it appeared to be water. A water paste test was utilized, and the indication was positive for water. The operator commented that examination of the inside of the fuel tanks revealed that the sump drain valves protruded up about 1/2 inch above the bottom of the tanks. The operator suggested that pilots drain the engine sump completely, rock both wings vigorously during preflight, and drain fuel from the engine and wing sumps again.