Lease vs. Buy Analysis
WHY BUY IT WHEN YOU CAN LEASE IT?
Angelo Rossi opened his little “upscale” Italian restaurant almost 25 years ago in the
heart of New York City. His specialty was the freshly baked bread oozing with homemade garlic
butter and of course, the delicious varieties of pasta and lasagna. The ambience and aroma were
simply out of this world and kept bringing the customers back for more.
An immigrant from southern Italy, Angelo put all his savings into his business. With the
help of his wife, Maria, and their son Paulo, Angelo kept the restaurant running smoothly and
helped it gain tremendous popularity among many New Yorkers. Angelo was always proud of
the fact that he owned everything in his restaurant, right from the property on which it stood
down to the plates on which the food was served. Everything had been paid for with his own
hard-earned cash. Being from the “old-school”, Angelo always believed that to be a debtor is to
be a slave to the lender. He, therefore, chose to save up and pay cash for whatever was needed.
Over time the restaurant’s clientele grew significantly and the wait times during peak
periods became unbearably long. After careful consideration, Angelo relocated the restaurant to a
much larger site with ample parking and tables. As always, the move was financed with cash.
Then about three years ago, Angelo retired and turned over the business to Paulo. Having
watched his dad nurture the business, Paulo kept up the family tradition of excellent service and
personal attention to details.
Along with the business, however, Paulo inherited some worn out equipment, which
surely had “seen better days”. Paulo was sick and tired of making frequent phone calls to the
service company for equipment repairs and maintenance work. As a result, the restaurant service
quality was beginning to deteriorate and profits were being hurt. In particular, three ovens, a
dishwasher, and a pasta machine needed to be replaced. The total cost of the equipment including
delivery and installation was estimated to be $100,000. The equipment was subject to a 30%
Now if it were Papa Rossi at the helm, there would have been enough cash in the coffer
to buy the equipment outright. However, under Paulo, the cash balance of the firm had shrunk
miserably. The problem with Paulo was that unlike his father, he enjoyed a much more lavish
lifestyle. The flashy sports car, penthouse, and boat were all paid in full from business profits,
leaving not much cash for business renovation and equipment replacement. On numerous occasions, Papa Rossi had tried to counsel his son on the benefits of being thrifty but to no avail.
Young Paulo preferred to live for today.
Thanks to Papa Rossi’s conservative ways the credit rating of the restaurant had been
exemplary. The money for the equipment could be easily borrowed from their bank at a rate of
10% per year over a 5-year term. However, P