Katrak Executive Summary
Executive Summary
Statement of the Problem
In 1970, the U.S congress founded the National Railroad Passenger Corporation (Amtrak) to provide efficient rail service. Amtrak is the primary provider of passenger-rail service in the United States, operating 516 stations in 44 states. Amtrak received federal funds to be used for their operating expenses. In the late 1990s, the National Railroad passenger Corporation (Amtrak) faced difficulties in being self-sufficient; as a result, the U.S Congress cancelled their federal funds by 2002. For this reason, in April 1999, Amtrak came up with a new plan called, the “Acela” line, which will have high speed and high efficiency in Northeast Corridor. Amtrak is considering to purchase 15 high-speed locomotives and 20 train sets to meet the …show more content…
Considering that Amtrak is going to be unprofitable, the corporate tax rate will be calculated as zero percentage. The useful life of the equipment is 25 years and residual value is 15% of the cost. After getting the results of DFC model of both the leverage-lease and the debt financing, it is easy to define that both options have advantages and disadvantage. The leverage-lease cost of debt is 220.26M, and the debt financing is 260.26M; therefore the leverage- lease is better. The disadvantage is that the equipment is a lease, and Amtrak sooner or later will have to return it, instead keep it. The advantage of debt is that Amtrak can keep equipment after the debt has been paid. Obtaining a lease creates value by adding convenience of not having to do maintenance in-house and saves time and resources for concentration on other things. Debt financing will creates pressure on Amtrak for greater cash flow to over increased interest expense that might need to be covered by selling assets short of
Statement of the Problem
In 1970, the U.S congress founded the National Railroad Passenger Corporation (Amtrak) to provide efficient rail service. Amtrak is the primary provider of passenger-rail service in the United States, operating 516 stations in 44 states. Amtrak received federal funds to be used for their operating expenses. In the late 1990s, the National Railroad passenger Corporation (Amtrak) faced difficulties in being self-sufficient; as a result, the U.S Congress cancelled their federal funds by 2002. For this reason, in April 1999, Amtrak came up with a new plan called, the “Acela” line, which will have high speed and high efficiency in Northeast Corridor. Amtrak is considering to purchase 15 high-speed locomotives and 20 train sets to meet the …show more content…
Considering that Amtrak is going to be unprofitable, the corporate tax rate will be calculated as zero percentage. The useful life of the equipment is 25 years and residual value is 15% of the cost. After getting the results of DFC model of both the leverage-lease and the debt financing, it is easy to define that both options have advantages and disadvantage. The leverage-lease cost of debt is 220.26M, and the debt financing is 260.26M; therefore the leverage- lease is better. The disadvantage is that the equipment is a lease, and Amtrak sooner or later will have to return it, instead keep it. The advantage of debt is that Amtrak can keep equipment after the debt has been paid. Obtaining a lease creates value by adding convenience of not having to do maintenance in-house and saves time and resources for concentration on other things. Debt financing will creates pressure on Amtrak for greater cash flow to over increased interest expense that might need to be covered by selling assets short of