Statement of the Problem
In April 30, 1999, the National Railroad Passenger Corporation(Amtrak) will review a leveraged-lease proposal from BNY Capital Funding LLC(BNYCF) along with other financing options. The government will eliminate federal funding for any of Amtrak's operating expenses by 2002 . Therefore, Amtrak has developed a new high speed train line called Acela, which will bring in net annual revenues of $180 million by 2002. Amtrak needs to raise $267.9 million to purchase six locomotives and seven train sets. Assuming that Amtrak will have a tax rate of 0%, it has three options to gain use of the equipment: 1) borrow money to finance the purchase, 2) lease the equipment using a leveraged-lease proposal from BNYCF, or 3) use federal funding. A discounted cash flow(DCF) analysis will be used to find the most appropriate method.
Amtrak is considering the option to issue bonds with a 20-year term at 6.75% per annum to purchase the equipment, calling on it to make semiannual payments of $12.303 million. In addition, it also has the option to sell the equipment at the end of its 25-year life for $40.185 million. Assuming that Amtrak has a tax rate of 0%, the net present value(NPV) of this option will be approximately $260.26 million.
Another option for Amtrak is a leveraged-lease structure where the Export Development Corporation(EDC), the sole debt provider, will provide 80% for the required funds. The other 20% will be coming from BNYCF as an equity investment. The terms of the structure include semiannual payments with a discount rate of 6.75%, and includes an early-buyout option from BNYCF for $126.6 million by 2017. The NPV of this leveraged-lease structure is $220.26 million. The early-buyout option has an option value of $2.97 million, therefore that will bring the adjusted NPV to $217.29 million.
Amtrak can theoretically use a federal grant to purchase the Acela equipment, as Congress has...
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