Harvard Case - Leasing Computers at Persistent Learning
"Leasing Computers at Persistent Learning" Harvard business case study is written by Devin Shanthikumar. It deals with the challenges in the field of Accounting. The case study is 10 page(s) long and it was first published on : Jul 26, 2007
At Fern Fort University, we recommend that Persistent Learning adopt a hybrid approach to computer acquisition, combining leasing with outright purchase. This strategy will balance the benefits of both options, allowing Persistent Learning to optimize its IT infrastructure while maintaining financial flexibility and controlling costs.
2. Background
Persistent Learning, a rapidly growing educational technology company, faces a critical decision regarding its computer acquisition strategy. The company needs to expand its computer fleet to accommodate its growing student base and evolving curriculum. However, the high cost of purchasing new computers coupled with the rapid pace of technological advancements presents a significant challenge.
The case study revolves around the decision-making process of the company's CEO, David, and his team. They are considering two main options: leasing computers or purchasing them outright. Leasing offers lower upfront costs and flexibility in upgrading to newer models, while purchasing provides ownership and potential tax benefits.
3. Analysis of the Case Study
To analyze the situation, we can utilize a framework considering both financial and operational aspects:
Financial Analysis:
- Cost Analysis: Leasing offers lower upfront costs but may result in higher overall expenses over the long term due to lease payments. Purchasing involves a significant initial investment but allows for potential depreciation tax benefits.
- Cash Flow: Leasing generally results in predictable cash flow due to fixed monthly payments. Purchasing requires a large initial cash outlay but can free up cash flow in the long run.
- Financial Statements: Leasing impacts the balance sheet by increasing liabilities and reducing assets. Purchasing increases assets and potentially increases equity through depreciation tax benefits.
- Profitability: The choice between leasing and purchasing will impact the company's profitability based on the timing and magnitude of expenses and revenue.
- Risk Management: Leasing can mitigate the risk of technological obsolescence by allowing for easy upgrades. Purchasing exposes the company to the risk of rapid depreciation and the potential for equipment becoming outdated.
Operational Analysis:
- IT Management: Leasing simplifies IT management by outsourcing maintenance and support. Purchasing requires internal expertise and resources for equipment maintenance and upgrades.
- Asset Management: Leasing allows for easier disposal of outdated equipment. Purchasing requires the company to manage the entire lifecycle of the computers, including disposal.
- Flexibility: Leasing provides flexibility in adapting to changing technology needs and student demands. Purchasing can limit flexibility due to the upfront investment and potential for outdated equipment.
4. Recommendations
Persistent Learning should implement a hybrid approach to computer acquisition, combining leasing with outright purchase.
Specific Recommendations:
- Lease a significant portion of the computer fleet: This will allow the company to benefit from lower upfront costs, flexible upgrades, and simplified IT management.
- Purchase a smaller portion of the computer fleet: This will provide the company with ownership of some equipment, allowing for potential tax benefits and long-term cost savings.
- Develop a clear acquisition strategy: This strategy should outline the criteria for determining which computers to lease and which to purchase. Factors to consider include:
- Usage patterns: High-usage computers with a high risk of obsolescence should be leased.
- Specific software requirements: Computers with specialized software or hardware requirements may be better suited for purchase.
- Budget constraints: The company's budget should be considered when making acquisition decisions.
- Negotiate favorable lease terms: The company should negotiate competitive lease rates, flexible upgrade options, and comprehensive maintenance services.
- Develop a comprehensive asset management plan: This plan should outline procedures for managing the company's computer fleet, including tracking, maintenance, and disposal.
5. Basis of Recommendations
These recommendations are based on a comprehensive assessment of Persistent Learning's needs, financial situation, and operational considerations.
- Core Competencies and Mission Consistency: The hybrid approach aligns with Persistent Learning's mission of providing high-quality education through innovative technology. It also allows the company to focus on its core competencies in education and curriculum development.
- External Customers and Internal Clients: This strategy addresses the needs of both students and faculty by providing access to modern technology while minimizing financial burdens.
- Competitors: The hybrid approach allows Persistent Learning to remain competitive by offering students access to cutting-edge technology without incurring excessive costs.
- Attractiveness: The hybrid approach offers a balance of financial and operational benefits. By combining leasing and purchasing, the company can optimize its IT infrastructure while maintaining financial flexibility and controlling costs.
Assumptions:
- The technology market will continue to evolve rapidly, requiring frequent upgrades.
- Persistent Learning's student population will continue to grow.
- The company has access to reliable and affordable leasing options.
6. Conclusion
Adopting a hybrid approach to computer acquisition will allow Persistent Learning to optimize its IT infrastructure while maintaining financial flexibility and controlling costs. This strategy will enable the company to provide students with access to modern technology, remain competitive, and achieve its long-term goals.
7. Discussion
Alternatives not selected:
- Purchasing all computers: This option would provide ownership but could lead to high upfront costs, limited flexibility, and the risk of technological obsolescence.
- Leasing all computers: This option would offer flexibility and lower upfront costs but could result in higher overall expenses over the long term.
Risks and Key Assumptions:
- Technological obsolescence: The rapid pace of technological advancements could make leased computers outdated quickly.
- Lease contract terms: Unfavorable lease terms could lead to higher costs and limited flexibility.
- Financial constraints: The company's financial situation may limit its ability to purchase computers.
8. Next Steps
- Develop a detailed implementation plan: This plan should outline the specific steps involved in implementing the hybrid approach, including budget allocation, vendor selection, and contract negotiation.
- Establish a monitoring and evaluation system: This system will track the effectiveness of the hybrid approach and identify areas for improvement.
- Communicate the new acquisition strategy to stakeholders: This will ensure that all relevant parties are aware of the changes and their implications.
By implementing these recommendations, Persistent Learning can ensure that it has the necessary IT infrastructure to support its growth and achieve its educational goals.
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Case Description
Newly public Persistent Learning is acquiring vital computer assets. They need to determine how the lease or purchase decision will impact their financial statements, and how the market will react given previously forecast earnings and competitor's accounting.
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