Question

Imagine you are tasked with shopping for a space to open a new restaurant for your boss. You have found a target neighborhood for the restaurant with two options for location.

One location is available for lease, and the other is available for purchase. How would you advise the owner of the business on the options for each restaurant location? What factors must be considered?

Compare and contrast options for each location. Provide variables for the expectation of the future value to affirm your recommendation.

Answer 1

We know that to find a location to start up for a business is too difficult. Here we have two options one is purchasing and another one is leasing. Now we first compare the economics of leasing and purchasing. The common advantage of leasing a space is that the initial outlay of cash to gain the use of an asset is generally less for leasing than it purchasing. On the same way the main advantage of purchasing the space you end up paying out less in the long term than we would have paid. If we are purchasing the space means we benefitted any appreciation of that particular space. Now we can take some economic aspects of selecting purchasing or leasing decision.

Cash flow analysis: We know that the cash flow analysis estimate how much cash would need to set aside today to cover after tax costs. Here we take some variables under consideration. That is, purchase and finance terms, tax rates, depreciation, the cost of capital, etc.

To make the decision regarding purchasing or leasing is based on the following facts we consider,

1. The control of property
2. To consider the long term costs
3. Should find suitable property
4. Idea regarding appreciation of the land value
5. The maintenance costs
6. Area of property located, etc.