Since the Reem Clinic is one of the few clinics specialized in heart transplantation in the country, there is a potential to attract and care more patients. However,current clinic capacity is limited so they are planning to buy a new building in Reem Island to offer rooms for patients coming from other regions. Their plan is to invest 20 million dollars and expected a minimum ROIC of 30%.
the data collected by the Mc ISYE consulting firm reveal that :
the new building will have 100 rooms
the Reem Clinic can charge 6000 dollar per room from patients per month.
demand forecast shows 80% of the building will be occupied each month on average.
the building needs to be maintained( security , maintained ,etc) which costs 100000 dollar per month regardless of occupancy.
there is a variable cost of 200 dollar per month for each room occupied.
a) define the return on invested capital as the ratio of the profits( per year) and the invested capital.
b) draw an ROIC tree.
c) with the current expectation (minimum 30% ROIC), do you recommend Reem Clinic to invest on this? i not feasible with the current numbers,can you make any further suggestions?