Amg/Forsythe: Lease vs. Buy
AMG/Forsythe: Lease vs. Buy
AMG Inc, a Fortune 500 financial services company, is implementing 7,542 new PCs in the time frame of twelve months in multiple locations covering eight states. This is a $7.5 million technology financing decision which needs to be investigated. The current decision that Adam Stolz, controller for the CFO, faces is whether AMG should lease or buy the new PCs. Also, he is under pressure from the CEO to keep the transaction off of the balance sheet, in which case the equipment/software would have to be defined as an operating lease, according to the standards defined in FAS 13. The lease options consist of a 24-month lease or a 36-month lease, and AMG could also choose to purchase the computers for the same
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After deducting tax from the payments, the NPV of hardware payments is $(3,356,228). Using the effective rate of 7.23%, the EAC for hardware is therefore $(1,862,196). Software payments were determined the same as hardware, except the cost of debt for software is 11% and the equity insertion is 0%; these payments were found to be $87,081, which is in line with Forsythe’s lease rate ratio. After accounting for tax deductions, the NPV of software payments is $(1,244,430) and using an effective rate of 11.57%, the EAC is $(732,187). The total NPV of leasing both hardware and software is $(4,600,658) and the total EAC is $(2,594,383). In the case of computing the NPV of leasing minus buying at the cost of debt, we determined the NPV of leasing hardware versus buying hardware to be $(266,306), the NPV of leasing software versus buying software to be $11,522, and the combined NPV to be $(254,784). In the case of leasing the hardware and purchasing software, a weighted average of the costs of debt was used to discount the cash flows from leasing hardware plus buying hardware minus buying both, for a NPV of $(195,250).
The second scenario we used was determining the NPV of leasing the hardware and purchasing the software. By using the NPV of