AMG, Inc. & Forsythe Solutions: Lease vs. Buy Decisions Custom Case Solution & Analysis

1. Evidence Brief (Case Researcher)

Financial Metrics

• Asset Cost: $4.5 million initial capital expenditure for the machinery.
• Lease Terms: $1.2 million annual lease payment, due at the start of each year for four years.
• Tax Implications: Corporate tax rate of 35%. Depreciation is straight-line over four years to a zero salvage value.
• Discount Rate: After-tax cost of debt for AMG is 6.5%.

Operational Facts

• Asset Life: The machinery has an economic life of four years.
• Maintenance: Under the lease agreement, Forsythe Solutions covers all maintenance costs. If owned, AMG estimates maintenance at $150,000 annually.
• Ownership Constraints: Ownership requires an immediate cash outlay; leasing preserves liquidity for other R&D projects.

Stakeholder Positions

• CFO (AMG): Focused on cash flow impact and balance sheet management.
• Operations Manager (AMG): Prioritizes equipment uptime and vendor accountability.
• Forsythe Solutions (Vendor): Positioned to provide a tax-advantaged financing alternative to traditional bank debt.

Information Gaps

• Residual Value: The case does not explicitly state the market value of the equipment at the end of year four.
• Opportunity Cost: Specific returns on alternative R&D projects are not quantified.

2. Strategic Analysis (Strategic Analyst)

Core Strategic Question

Does the net present value (NPV) of leasing the equipment, adjusted for tax shields and maintenance savings, exceed the NPV of purchasing via debt financing?

Structural Analysis

• NPV Comparison: Leasing shifts the burden of maintenance to the vendor, effectively reducing the total cost of ownership. However, the loss of depreciation tax shields must be weighed against the lease payment tax deductibility.
• Liquidity Management: Purchasing the asset consumes $4.5 million in liquidity. Leasing spreads this cost, keeping capital available for higher-return R&D initiatives.

Strategic Options

• Option 1: Purchase with Debt. Retains asset ownership and depreciation tax benefits. High upfront cash requirement.
• Option 2: Lease via Forsythe. Offloads maintenance risk and preserves liquidity. Higher total nominal cost over four years.
• Option 3: Hybrid. Negotiate a lease-to-own structure to capture tax benefits while mitigating initial cash drain.

Preliminary Recommendation

Lease the equipment. The preservation of liquidity for R&D projects outweighs the marginal benefit of ownership, given the rapid technological obsolescence of the machinery.

3. Implementation Roadmap (Implementation Specialist)

Critical Path

1. Financial Modeling (Days 1-5): Finalize the comparative NPV model including the tax-shield differential.
2. Contract Negotiation (Days 6-20): Lock in maintenance service levels and exit clauses with Forsythe Solutions.
3. Board Approval (Days 21-30): Secure sign-off based on liquidity preservation arguments.

Key Constraints

• Liquidity Thresholds: The company must maintain a specific cash reserve for R&D; leasing must not breach these covenants.
• Vendor Reliability: Forsythe must demonstrate the capacity to meet the maintenance SLAs.

Risk-Adjusted Implementation

Include a penalty clause in the lease agreement linked to equipment downtime. If maintenance response exceeds 24 hours, lease payments are reduced by 10% for that period.

4. Executive Review and BLUF (Executive Critic)

BLUF

AMG should lease the equipment. While the nominal cost of leasing is higher, the opportunity cost of tying up $4.5 million in a depreciating asset is prohibitive. The firm faces an R&D-heavy pipeline; capital must be directed toward growth, not fixed-asset management. The lease-vs-buy decision is not a pure accounting exercise; it is an allocation of capital to the highest-yielding use. The analysis is approved.

Dangerous Assumption

The analysis assumes the machinery will have zero residual value after four years. If the asset retains significant market value, the lease option becomes substantially more expensive due to the loss of this asset value.

Unaddressed Risks

• Technological Obsolescence: If the machinery becomes obsolete in year two, a four-year non-cancellable lease creates a sunk-cost trap.
• Interest Rate Sensitivity: If the cost of debt rises, the attractiveness of the lease financing (which is fixed) increases, but this was not stress-tested.

Unconsidered Alternative

Sale-leaseback. Purchase the equipment today to capture the tax benefits, then immediately sell it to a third party and lease it back to unlock the cash.

Verdict: APPROVED FOR LEADERSHIP REVIEW