Is this an operating lease....meaning you would pay $205,974 per year as long as you have lease and will not own the property at the end of lease or is it a capital lease wherein you will pay $205974 for a number of years and own the property at the end of the lease...
$1173125...is this amount spent by you in addition to the rent paid or is it the value of the assets on which you will pay the rent for a number of years?
Attached is the worksheet with the analysis...I have assumed that you will borrow the funds required for investment $1,173,125 at 9%.
Present value analysis generally means that if you have inflow coming in over a period of years than what is it's value as of today. You can then use the present value so arrived with your invesment and determine if the investment is profitable or not. We can do a present value analysis for your project but for that we need to know the inflows over a number of years...
The ROI based on the information you provided is appx.11% after considering the interest expense.
You will capitalize the investment expenditure (as listed by you). But lease (rent) will not be capitalized unless you have the option to own the property at a bargain price at the end of the lease.
Let me know if you have any question.
Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases.
That would not change the analysis if you consider opportunity cost perspective.....assuming that you could have used the funds elsewhere and made 9%.....
But yes, if you will fund the investment than you can say that in that case your ROI will be 11% + 9% = 20%....
Tax and depreciation has not been considered in the analysis but tax(assuming tax rate of 33%) and depreciation (considering average write off over 10 years for analysis purposes)....may affect your ROI and reduce it to 17% appx.
You cannot capitalize the lease (which is Rent) unless you own the property at the end of the lease or you have an option to own the property at bargain purchase price. The rent in your case will be classified as operating lease unless you own it at the end of the lease. In order to capitalize the lease it should be a capital lease....discussed next..
A capital lease is a lease that transfers substantially all the benefits and risks inherent in the ownership of property to the state. A lease must meet one or more of the following four criteria to qualify as a capital lease:
You can however capitalize the build out and other expense incurred by you...
You can capitalize the Capital improvements which include structures (e.g., office build out, storage quarters, plans & and other facilities) and all other property permanently attached to, or an integral part of, the structure (e.g., loading docks, heating and air-conditioning equipment, and refrigeration equipment).
You can capitalize Furniture, fixtures, gaming equipments, menu boards. software, or other equipment etc.. which not an integral part of a building as either furniture or equipment.
You can capitalize signage.
You can capitalize preopening costs as other intangible assets and amortize these expenses.