Question

After 3 months on the job, you have now been tasked to provide an investment recommendation to the Board of Directors of UCW. Currently, UCW is looking to lease an additional 2,000 square feet in Vancouver House. Assume that it currently has 10,000 square feet under lease and that the additional potential space is located on the 1st floor. Zoning for this space provides for multiple potential uses, including retail, restaurants and education.
You are to propose a recommendation to lease the 2000 square foot space. What would you use use it for and would it provide a positive return on investment?
In your analysis, use the knowledge gained in this course, including the concepts introduced on CVP, incremental and capital budgeting techniques. Highlight the key inputs and the basis for the assumptions/ estimates in arriving to your conclusion. You may identify any factors that you believe would contribute to your analysis and use external sources from industry to put together estimates. If a tax rate is needed, for example, provide a reasonable estimate. Market research on lease rates, etc.. while not specifically required, will contribute to the quality of the analysis.
Please include an executive summary, analysis with any spreadsheets, conclusion and a summary/ list of assumptions made.

Answer 1

As, UCW is looking to lease the additional 2000 square foot space.

so, as per my recommendation this additional space is surely a better option for the restaurants , contruction of a library or a gaming zone for children and that will give them the positive return on the investment.

As per the CVP analysis, it is used to determine the sales volume required to acheive a specific profit., so it says changes in the profits and costs can be made only if sales increases. so according to the situation if UCW will use there additional space for productive things like restaurants or library than it will automatically increases there sales, which leads to profit generation.

Capital Budgeting Techniques that can be used in this situation:

1. Payback - payback is one of the best way to budget for a new asset, i.e the quicker the payback period, quicker the company will be able to recover its costs .

2. NPV - This is used to analyze the profitability of the project , npv greater tan 1 is accepted and lesser than 1 is rejected.

there are more techniques like IRR and profitability index , when npv is 0 it is called IRR.

conclusion and assumptions:

with our study on some basic budgeting techniques and cost value analysis we came to know that the value on new asset can be retained as soon as it is put into work.

so as per UCW their additional 2000 square foot will definetly provide them positive return on investment as they will put there asset on lease and generate revenues, and the best projects for there space on 1st floor could ba a library, restaurants or a gaming zone