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Amtrak

The National Railroad Passenger Corporation (AMTRAK) planned to introduce a new high-speed train called Acela to reduce travel times, with a total capital cost of $750 million. AMTRAK had already secured $482.1 million in funding and needed an additional $267.1 million. To obtain this funding, AMTRAK considered borrowing from a bank at 6.75% interest over 20 years, leasing the funds from a bank with an option to purchase the assets after 20 years, or taking a federal grant. However, a financial analysis found that leasing the funds for 20 years had the highest net present value of $173 million compared to borrowing at $178 million, so AMTRAK decided

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Amit Jindal
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412 views1 page

Amtrak

The National Railroad Passenger Corporation (AMTRAK) planned to introduce a new high-speed train called Acela to reduce travel times, with a total capital cost of $750 million. AMTRAK had already secured $482.1 million in funding and needed an additional $267.1 million. To obtain this funding, AMTRAK considered borrowing from a bank at 6.75% interest over 20 years, leasing the funds from a bank with an option to purchase the assets after 20 years, or taking a federal grant. However, a financial analysis found that leasing the funds for 20 years had the highest net present value of $173 million compared to borrowing at $178 million, so AMTRAK decided

Uploaded by

Amit Jindal
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

AMTRAK Arcela Financing History The National Railroad Passenger Corporation (AMTRAK) was established in 1970 by the United

States Congress to ensure modern & efficient rail system in the country. Historically AMTRAK had never been a profitable company and had a history of receiving annual subsidies for operating expenses from the Federal government. The subsidy for operation expense has been discontinued from 2002. However, AMTRAK will continue to receive subsidy for infrastructure or capital spending projects. Problem Statement AMTRAK had planned to introduce fast train named Acela, which will reduce the travel time significantly. The total capital expenditure for this new train infrastructure is estimated to be $750 million. AMTRAK had already tied up funding for the equipment worth $482.1mn and require additional financing for the remaining $267.1 mn. AMTRAK had three options to fund the shortfall viz. borrow from bank, lease from bank or Federal Grant Funding. Analysis In the borrowing option, AMTRAK had to borrow the required funds from a bank at an interest rate of 6.75%. The conditions of the loan require AMTRAK to repay the loan in 20 years at semi-annual payment of $12.303mn. However considering that AMTRAK had already issued debt and additional debt will saturate the market or AMTRAK ability to further raise debt for the future projects. In the second option, AMTRAK will make lease payment to BNY capital funding as per the lease schedule for the next 20 years, with an embedded option to purchase the asset for $126.6mn in 2017. The said lease will be an operating lease and will result in loss of depreciation for AMTRAK. It has to account the lease as operating lease and charge off the lease repayment as operating expense. In the third option, AMTRAK is unwilling to take the Federal grant. AMTRAK consider Federal grant as premium and proposes it to utilize for the projects, for which immediately funding is not available. As for the current situation, AMTRAK is having funding options, therefore it has ruled out taking grant from Federal to fund this project. Doing the financial analysis for the two available options, the borrowing options has NPV of $178mn as compared to NPV of $173mn for lease options and $217mn for lease and buy in 2017. Recommendation Therefore based on financial analysis and without considering the Federal grant, AMTRAK should opt for lease options for the next 20 years.

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