Amtrak Case Solution

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Executive Summary Statement of the Problem: On April 30, 1999, the National Railroad Passenger Corporation (Amtrak) is considering financing options to purchase an equipment for Amtrak’s new train service, Acela. Acela is a new high speed rail service that will service the Northeast Corridor, which serves routes from Virginia to Maine. Congress passed the Amtrak Reform and Accountability Act (ARAA), which prevents Amtrak from using federal funds for operating expenses after 2002. By 2002, Acela is estimated to generate $180 million in revenues and consequently making Amtrak a self-sustaining company. The project requires $267.9 million to fund six locomotives and seven train sets and have three options to acquire the equipment: 1) issue debt to finance the purchase, 2) lease the equipment using a leveraged-lease structure, or 3) use federal grant monies. A discounted cash flow analysis on the three options has been performed to determine the most cost-efficient option. We will assume two potential scenarios when analyzing the options: 0% tax rate (operating at a loss) and 38% tax rate (operating with a gain). Discussion: Amtrak could issue bonds with a 20-year term at 6.75% per annum to purchase the equipment. They would make semiannual payments of $12.303 million and can sell the equipment at the end of its 25-year useful life at $40.185 million. If Acela’s revenue expectations are not met and Amtrak remains unprofitable, the present value of the cost of this option would be 260.26 million. Assuming profitable, the present value of the costs would become approximately $164.77 million due to the benefit of the tax shield. Also, Amtrak is considering an 80% debt to 20% equity leveraged-lease structure to finance the locomotives and train sets. They would make semiannual payments and has the option to buy the equipment from the equity investor, BNY Capital

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