National Railroad
Topics: Depreciation, Lease, Finance lease, Finance, Leasing, Rail transport / Pages: 9 (2191 words) / Published: Dec 3rd, 2013

1st Executive Summary

In 1970 congress created the National Railroad Passenger Corporation to provide some of the best passenger rail service provided in the United States. Today, National Railroad is looking in to a new line of trains that are much faster and will cut today’s commuting times substantially. However, they are facing 3 different options for funding this new acquisition. One of the options is to issue new bonds and therefore borrow the money and purchase these trains. The second option is a leveraged lease proposed by Bank of New York Capital Funding. The final option is to rely on federal funding. Some of the assumptions facing this acquiring of the asset are that they will have a useful life of 25 years. The train sets will also have a residual value of 15 percent of the original cost of the equipment. Straight-line depreciation will be used for the purposes of accounting while the seven year MACRS system will be used for tax purposes (Case35). We agreed with the case that national railroad should not pursue the funding through the federal sources. Since they are used to relying on these funds for safety, infrastructure right of way, and major overhauls we felt they should not use these incase of any emergency need of funds. These would be the easiest and most readily accessible. The first option we looked at was the option of a financial lease. A financial lease consists basically of a rental contract between the lessee and lessor. The person is considered the lessee and is the one with the rights to us the asset and therefore makes payments to the lessor. The payments made by the lessee are considered tax deductable. This is one of the major advantages of the lease. Another important advantage of a lease is that there is less of an initial cash requirement so you are not required to have a substantial amount up front. Another option we looked at was the opportunity of issuing bonds for the borrow and buy method.

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