Parsa Real Estate is a company that buys and rents real estate. The company is looking into buying an office building for $1M.Thebuilding 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=2L0.2*Rent
(Rentisindollarspersquarefootpermonth.Also,at$6.00,Oscarthinkshecanfillabout80% 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 there turn on invested capitals the ratio of the profits (PERYEAR)and the invested capital. You can drawan 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 questions.
Question 3
HINT: ROIC = (revenues - costs) / invested capital. Use occupancy rate to determine revenues; use fixed and variable costs to determine costs
Question 4
New ROIC (in decimal form):
ROIC = (revenues - costs) / invested capital
Indicate your specific subject in the "School Subject" box, so those with expertise in the area will respond to the question.
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To calculate the ROIC (Return on Invested Capital) for Parsa Real Estate buying the office building, we need to follow these steps:
1. Determine the Occupancy Rate:
The occupancy rate is given by the formula %Occupied = 2L0.2*Rent.
Given that the rent is $6 per square foot per month, and Oscar thinks he can fill about 80% of the office space at this price, we can calculate the occupancy rate.
%Occupied = 2 * 0.8^2 * $6
%Occupied = 0.256 * $6
%Occupied = $1.536
2. Calculate Revenues:
Revenues are determined by multiplying the occupancy rate by the total rentable office space and the rent amount.
Revenues = %Occupied * Rentable Office Space * Rent
Revenues = $1.536 * 10,000 square feet * $6
Revenues = $92,160
3. Calculate Costs:
The costs consist of two components:
- Fixed costs (e.g., security, insurance, maintenance), which are $10,000 per month.
- Variable costs, which are $2 per square foot per month for each square foot occupied.
Fixed Costs = $10,000 per month
Variable Costs = $2 * %Occupied * Rentable Office Space
Variable Costs = $2 * $1.536 * 10,000 square feet
Variable Costs = $30,720
Total Costs = Fixed Costs + Variable Costs
Total Costs = $10,000 + $30,720
Total Costs = $40,720
4. Calculate Invested Capital:
Invested Capital is the amount Parsa Real Estate has invested in buying the office building. In this case, the building cost is $1M.
Invested Capital = $1,000,000
5. Calculate ROIC:
ROIC = (Revenues - Costs) / Invested Capital
ROIC = ($92,160 - $40,720) / $1,000,000
ROIC = $51,440 / $1,000,000
ROIC = 0.05144
The new ROIC for Parsa Real Estate, in decimal form, is 0.05144.
To answer Question 3 and 4, we need to calculate the revenues, costs, and invested capital.
First, let's calculate the revenues based on the occupancy rate. We know that the analysts predict they can rent the office space for $6 per square foot per month, and at $6.00, they believe they can fill about 80% of the office space. So the revenue per square foot per month is $6, and the percentage occupied is 80%.
Revenues = (Rent per square foot per month) * (Percentage occupied) * (Total square footage)
Revenues = $6 * 0.8 * 10,000 square feet
Next, let's calculate the costs. The building has a fixed cost of $10,000 per month for security, insurance, maintenance, etc., regardless of occupancy. Additionally, there is a variable cost of $2 per month for each square foot occupied.
Fixed costs = $10,000 per month
Variable costs = ($2 per square foot per month) * (Square footage occupied)
Now that we have the revenues and costs, we can calculate the new ROIC.
New ROIC = (Revenues - Costs) / Invested capital
To calculate the invested capital, we'll need to know the purchase price of the building. However, the purchase price of the building is not provided in your question. Please provide the purchase price so that we can calculate the invested capital and answer the questions.