Question

Oscar is considering getting into the real estate business. He's looking at buying an existing office building for $1.8 million in cash. He wants to estimate what his return on invested capital (ROIC) will be on an annual basis. The building has 14,000 square feet of rentable space. He'd like to set the rent at $4.00 per square foot per month. However, he knows that demand depends on price. He estimates that the percent- age of the building he can fill roughly follows the equation: % Occupied 2 0.3 Rent (rent is in dollars per square foot per month) So, at $4.00, Oscar thinks he can fill about 80 percent of the office space. Oscar considers two categories of costs: variable costs, which are a function of the square feet occupied, and fixed costs. Fixed costs will be $8,000 per month and include such items as insurance, maintenance, and security. Variable costs cover such things as electricity and heat and run $1.25 per month for each square foot occupied.
What is the ROIC?
What would be the new ROIC be if Oscar decides to charge rent of $5.00 per square foot per month?


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  • CreatedMarch 31, 2015
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