AMG, Inc. & Forsythe Solutions: Lease vs. Buy Decisions

Abstract

Examines the lease vs. buy decision for investments in technology. Addresses pivotal investment decision issues such as varying the length of the lease, the useful life of the equipment, and alignment with the company's overall financial strategy. The scenario is for a real financial services firm that has been disguised for confidentiality reasons. Presents an investment decision: should a company buy or lease technology with a relatively short useful life? The new controller at AMG, a Fortune 500 financial services firm, has been tasked with determining how to finance the acquisition of 7,542 new PCs to be rolled out over the next 12 months. This is a $6.7 million investment decision and the rollout schedule adds significant complexity to the solution. The controller must choose between buying or leasing the computers over 24- or 36-month time frames. Provides a framework for analyzing similar investment decisions. The key learning point is that leasing information technology can be cheaper than buying. This is contradictory to a car lease, which may be familiar from everyday experience. A new car has a potentially long useful life and can retain significant value after several years, hence, intuition is that buying should always be cheaper than leasing. Shows that this is not the case for information technology. Teaches the correct application of the mid-quarter convention within MACRS depreciation for technology, and the implications of operating vs. capital leases and off-balance-sheet financing. In the process, introduces the four tests for a capital lease. Finally, shows how creative analysis techniques can be used to simplify complex decisions. These techniques aid in arriving at a conclusion faster and with less effort.

To illustrate the fundamentals of lease vs. buy decisions in technology and how they differ from the typical capital equipment lease vs. buy decision. Topics covered include MACRS depreciation and off-balance-sheet financing for a complex leasing scenario staggered in time across multiple business units.

Citation

Jeffery, M., Ekici, H.N., Shield, C. and Conley, M. (2017), "AMG, Inc. & Forsythe Solutions: Lease vs. Buy Decisions", . https://doi.org/10.1108/case.kellogg.2016.000014