Should Dar Purchase Or Continue To Rent a Warehouse For Their Products Part 1

Research Proposal and Action Plan Research Question: Should Dar purchase or continue to rent a warehouse for their products? Rationale Dar is considering storing their products in a new warehouse since the company needs to increase its storage capacity for their products (Kanchev, Appendix 1). I will investigate whether the company should purchase or rent a new warehouse. Theoretical Framework I will use Financial Ratios, the Gearing and Current ratios to examine the long-term financial position of the company if the warehouse is bought and whether the company would be able to pay its short-term obligations including the down payment for the warehouse (Hoang). I will use a Force-Field Analysis (FFA) to evaluate the advantages and disadvantages of buying a warehouse (Hoang). I will make a Buy vs Rent analysis to see which choice is financially more advantageous. Proposed Methodology I will interview the following people: the owner, Mr. Kanchev, about some possible qualitative advantages of buying a warehouse, the General Manager, Mr. Stoychev, for the financial implications, Mr. Ivanov, the operational manager, for the operational benefits and disadvantages of buying a warehouse and Mr. Venelin Nikolov, an economist, to assess that their quantitative and qualitative analysis is correct. I will consult financial sources including the balance sheet and buy vs rent information. The balance sheet is from 2018 due to confidentiality. I will use them for the gearing and current ratio analysis and the buy vs rent analysis. Anticipated Difficulties There may be a problem with information access. I will ask the general manager to send me the newest financial data on the purchase of the warehouse to have reliable information. The CEO, General Manager, and Operational manager may be biased since they may not consider all the qualitative and quantitative factors considered by each stakeholder. I will talk to Mr. Nikolov, the external economist to clarify whether their suggestions could be corroborated. I may not be able to conduct in-depth interviews. This is important for the FFA since the benefits of buying and renting should be weighted according to importance. Therefore, I will ask the different stakeholders for additional details regarding the weights. I will not be able to accurately determine the inflation in property and rent prices since they depend on external macro-economic factors. I will listen to the general manager s predictions based on previous trends and his intuition. Another problem is that the costs associated with renting and buying are based on approximations. Therefore, the calculations might not be accurate. To minimize the error, I will carefully consult this with the general manager. Action Plan 2019 June July-August September October Steps Modifications Contact the primary sources In October, an economist was contacted Schedule the interviews Gather additional business documents Rescheduled the interview with the general manager for August Received the balance sheet and buy vs rent analysis Write research proposal and introduction Write the methodology and key findings Do the analysis Do the conclusions, recommendations and executive summary Do the appendices Finishing 1st draft Figure 1-Action Plan Word Count: 499 Found an external source Considered additional flaws to methodology IB Business Management Internal Assessment Higher Level Written Report Content of the research This research project is written to help the company Dar to decide if it is better to purchase a warehouse or continue to rent a building for storage. It answers the following research question: Should Dar purchase or continue to rent a warehouse for their products? The intended audience is the owner of Dar, the AAS IB Business Management teacher, and the IB IA supervisor. Word count of the written report: 1992 Executive Summary The purpose of this project is to understand whether it will be more suitable for Dar, a private-limited company and supermarket chain in Bulgaria, to buy a warehouse or to continue renting one. A Ratio (gearing and current), Force-Field Analysis (FFA), and a Buy vs Rent analysis was used. Primary sources including the owner, the general manager, the operational manager, and an independent economist were interviewed. The Gearing and current ratio shows that the company can allow itself to purchase the warehouse since it will still remain in a stable financial position and can pay its short-term obligations. Buying a warehouse will be beneficial for the company when considering the advantages and disadvantages of the FFA. According to the Buy vs Rent analysis, it is also more suitable for the company to buy the warehouse than to rent it based on the operating expenses and capital gain. A caveat is that property and rent prices do not consistently increase. There could be a crisis which could interrupt price increases. Another flaw is that the fixed costs associated with buying the warehouse are not consistent: they can change due to inflation. These are important for the Buy vs Rent analysis. Word Count: 199 Research Project: Written Report Research Question: Should Dar purchase or continue to rent a warehouse for their products? Introduction Dar is a Bulgarian supermarket chain that operates nine supermarkets in Sofia. The company needs a larger warehouse (Kanchev, Appendix 1). The organization has discussed whether buying a new warehouse will lead to less warehouse expenses in the future and be more convenient for the company. The company stated that there are two possible options: to buy or to continue renting one. This IA explores whether the company should buy or rent a new warehouse for their products. Gearing and current ratios will be used from section 3.5. A Force-Field Analysis (FFA) from section 1.7 will be used. A Buy vs Rent analysis of a potential warehouse purchase and a potential warehouse rent will be used. This will include the hypothetical costs of buying or renting a property. Both options will be calculated to find out which one will be more financially suitable. Methodology used There was an interview with the owner. He discussed the strategic objectives of the company and the relevance to the buy vs. rent decision. He talked about the characteristics of the warehouse which they may purchase and the one which they might rent. There was an interview with the general manager. He talked about the financial implications of buying or renting a warehouse. There was an interview with the operational manager. He discussed the operational advantages and disadvantages of purchasing. An external economist was also contacted. He discussed what could be the final decision from an external perspective. The paper includes Financial Ratios, including the gearing and current ratios to examine the company's long-term financial position if the warehouse is bought and whether the company can pay its short-term obligations including the down payment (Hoang). An FFA was used to address the forces for and against change (the purchase). The Buy vs Rent analysis was included to assess whether the company should buy or rent the warehouse by using financial data. The qualitative data is reliable since the information originates from the stakeholders’ responses to specific questions. The CEO, general manager, operational manager and an independent economist were interviewed. The quantitative data was partially reliable since the general manager was contacted about the balance sheet and Buy vs Rent information and analysis. The balance sheet includes approximate sums from 2018 since the company wanted to keep its financial privacy (Stoychev, Appendix 2). Another limitation is that amortization wasn’t considered. The company can consider the depreciation of the asset during its life-time. The depreciation reduction can be included in the property tax return and could decrease the property tax over the ownership period (Stoychev, Appendix 2). The profit and loss statement was inaccessible due to financial privacy which prevented the calculation of the gross profit, net profit and the return on capital employed ratios (Stoychev, Appendix 2). For the Buy vs Rent analysis, the inflation of the fixed costs wasn’t considered (Stoychev, Appendix 2). Main Results and Findings There was information from the sources which is relevant to the analysis. Information for Financial Ratios The sums are from the balance sheet. Gearing Ratio Information: 2018 Sum (BGN) Long-Term liabilities 850,000 Capital Employed 5,048,000 Figure 2-Gearing Ratio Information (Appendix 2) Current Ratio Information: 2018 Sum (BGN) Current assets 29,789,000 Current liabilities 26,533,000 Figure 3-Current Ratio Information (Appendix 2) Information for the Force Field Analysis (FFA) For the FFA, there were advantages to buying the warehouse. It would be advantageous because buying a warehouse is better for the long-term financial security of the company (Stoychev, Appendix 2). Additionally, by buying, the company will be the legal owner of the warehouse (Ivanov, Appendix 3). Furthermore, the company may rent spare space of the property to clients in the future (Nikolov, Appendix 4). Another advantage is that the warehouse is easily accessible (Ivanov, Appendix 3). There were some disadvantages. There would be bureaucratic costs of ownership such as taxes related to ownership (Kanchev, Appendix 1). There may however be possible financial losses contingent upon external factors since property-ownership equity doesn’t necessarily build over time (Stoychev, Appendix 2). Additionally, there will be maintenance and administrative costs (Ivanov, Appendix 3). Moreover, the company will pay a large investment financed by a loan with a fixed-interest rate (Stoychev, Appendix 2). Information for the Buy vs Rent Analysis Buying: Purchasing Price 900,000 BGN Loan (interest) 720,000 BGN with a 3% annual interest Insurance Premium (annually) 1,500 BGN Maintenance (annually) 4,000 BGN Property Taxes (annually) 9,000 BGN Closing costs 26,500 BGN Inflation of Property Prices 2.5% annually Down Payment 180,000 BGN Renting: Initial Rent Fee (Annually) 72,000 Inflation of Rent Prices 3% annually Figure 4-Buy vs Rent Information (Stoychev, Appendix 2)