Parsa Real Estate is a real estate purchasing and rental company. The company is considering purchasing an office building for $1 million. The building features 10,000 square feet of profitable office space.

Company analysts predict they can rent office space for $6 per square foot per month, but demand is a function of price as follows: 

% Occupied = 2 - 0.2*Rent
(Rent is expressed in dollars per square foot per month. Also, at $6.00, Oscar believes it can take up about 80% of the office space).
The building needs maintenance (security, insurance, maintenance, etc.), which costs $10,000 per month regardless of occupancy. Additionally, there is a variable cost of $2 per month for each occupied square foot.

Define return on invested capital as the ratio of profits (PER YEAR) to invested capital. You can draw an ROIC tree the same way we draw a KPI tree in class. Simply have ROIC as “the root” of the tree instead of earnings. Then answer the following questions.

a. What is ROIC? (Please provide your answer in decimal form. For example, 0.25 for 25%)

b. What would be the new ROIC if Parsa Real Estate decides to charge rent of $8.00 per square foot per month? (Please provide your answer in decimal form. For example, 0.25 for 25%)

Answer rating: 100% (QA)

a What is ROIC To calculate the ROIC we first need to determine the annual profit The monthly profit ... View the full answer