Shilling & Smith Acquisition of Xteria Inc. Data Center Technology Leasing Case Solution

• Scenario One

Under scenario One, Shilling and Smith would have to make monthly lease payment to Forsythe Solutions (Leasing Company) for a total of 36 months. No upfront capital expenditure is incurred as none of the software or hardware equipment is being purchased. Debt rate of 8% (0.6667% per month) will be charged and equity insertion is 11%. The equity insertion is the amount of money the lessor takes off from the purchase price to determine the monthly lease payment. Monthly annuity payment is calculated using the PMT function in excel. PMT function inputs are monthly rate, number of periods and present value of future payments which equals the cost of software and hardware being leased. Per month lease payment amounts to $192,447. Company will also have to pay $96,667 per month for a total of 6 months to the integration team for their services. Total cost that the company will incur in scenario one is $7,507,718.

Please refer to excel “Table-Scenario One” for detailed calculations.  

• Scenario Two

In scenario two, Company can lease the hardware equipment only for a duration of 24 months or 36 months. Upfront payment of $1,480,000 is required to purchase the software and professional services. This cost will be capitalized and depreciated equally over a period of three years. Per year addition to company’s depreciation expense will be $493,333. In case of 24 months lease, debt rate is 7% (0.583% per month) and equity insertion equals 14%. Monthly annuity payment calculated using PMT function amounts to $231,027. Total cost to the company will be $7,024,636.

In case of 36 months, initial outlay and depreciation methodology will be the same as mentioned above. Debt rate and equity insertion rate will be the same as applied in scenario one. Annuity payment per month will equal $188,018. Total cost to the company in this case will be $8,248,655

Please refer to excel “Table-Scenario Two” for detailed calculations.   

• Scenario Three

Scenario three offers the company to lease HP keystone for 36 months, EMC equipment for 24 months and HP netservers for 24 months. Company will have to make initial outlay of $2,480,000 to purchase software, professional services and Cisco hardware equipment. Initial outlay will be capitalized and depreciated straight line over a period of 3 years. Per year addition to company’s depreciation expense will be $826,667. Total lease payment for HP keystone (24 months lease) amounts to $1,848,212 and for HP netservers and EMC equipment it equals $3,012,051. Total cost to be incurred, if scenario 3 is opted, is $7,340,264.

Please refer to excel “Table-Scenario three” for detailed calculations.  

1. Observations

Following observations can be made by comparing the three scenarios:

Company will incur the lowest cost ($7,024,636) if it opts for 24 month lease option under scenario two