Parsa Real Estate is a company that buys and rents real estate. The company is looking into buying an office building for $1M. The building has 10,000 square feet of rentable office space.
The company analysts predict that they can rent the office space for $6 per square foot per month, but demand is a function of price in the following way:
% Occupied = 2 - 0.2*Rent (Rent is in dollars per square foot per month. Also, at $6.00, Oscar thinks he can fill about 80% of the office space.)
The building needs to be maintained (security, insurance, maintenance, etc.), which costs $10,000 per month regardless of occupancy. Also, there is a variable cost of $2 per month for each square foot occupied.
Define the return on invested capital as the ratio of the profits (PER YEAR) and the invested capital. You can draw an ROIC tree in the same way that we drew a KPI tree in class. Simply have the ROIC as “the root” of the tree instead of profits. Then answer the following question.
What would be the new ROIC be if Parsa Real Estate decides to charge rent of $8.00 per square foot per month? (Please give your answer in decimal form. For example, 0.25 for 25%)