Chapter 21, Problem 2P

You are constantly trying to save your company some money. One decision you encounter is a make or buy decision for the new project manager. The make solution has an upfront cost of $25,000 plus $3,000 per month as a maintenance fee. The buy solution has an upfront cost of $20,000 plus $3,250 per month as a maintenance fee as well as a $250 per month subscription fee. What is the minimum usage period in months required for the company to justify the make decision, and if the project will last 1 year should the company make or buy?

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 is the ROIC?

Your firm spends $5,000 every month on printing and mailing​ costs, sending statements to customers. If the interest rate is   0.5% per​ month, what is the present value of eliminating this cost by sending the statements​ electronically?