Case Detail

Case Summary

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

Case Number: 5-404-762, Year Published: 2006

HBS Number: KEL217

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Authors: Mark Jeffery; H Nevin Ekici; Cassidy Shield; Michael Conley

Key Concepts

Equipment Leasing, Information Technology, Off balance Sheet Financing, MACRS, Depreciation, Capital Lease

Abstract

The AMG Inc and Forsythe Solutions case examines the lease versus buy decision for investments in technology. The case 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 of confidentiality reasons. The case poses the student with an investment decision; should the company buy or lease technology with a relatively short useful life? The new controller at AMG Inc., 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 twelve months. This is a $6.7M investment decision and the roll out schedule adds significant complexity to the case solution. The controller must chose between buying or leasing the computers over 24- or 36-month time frames. Completion of the case gives students a framework for analyzing similar investment decisions. The key learning point of the case is that leasing information technology can be cheaper than buying. This is contradictory to a car lease that students may be familiar with in their everyday experience. A new car has a potentially long useful life and can retain significant value after several years. Hence, a student’s intuition is that buying should always be cheaper than leasing. The AMG case shows that this is not the case for information technology. Students also learn the correct application of the mid-quarter convention within MACRS depreciation for technology, and the implications of operating versus capital leases and off-balance sheet financing. In the process, students will familiarize themselves with the four tests for a capital lease. Finally, the students will see how creative analysis techniques can be utilized to simplify complex decisions. These techniques will enable the student to arrive at a conclusion faster and with less effort.

Number of Pages: 8

Extended Case Information

Teaching Areas: Accounting, Finance, Management, Technology

Teaching Note Available: Yes

Geographic: United States

Industry: Financial Services

Organization Name: AMG, Inc. (disguised)

Organization Department: IT/Finance

Organization Size: Large

Decision Maker Position: Controller

Decision Maker Gender: Male