National Railroad

Topics: Depreciation, Lease, Finance lease Pages: 6 (2191 words) Published: December 3, 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. The borrow and buy method has some of its own advantages as well. A tax break can be received by deducting the payments of interest and depreciation. One thing we feel that Amtrak is facing is their eligibility for the tax liability. Since they have not been profitable in the past years, they more or less will not be able to take full advantage of the tax savings. Congress created National Railroad Passenger Corporation in 1970 to provide passenger rail service in the United States. Currently, they are launching a new line of trains that will revolutionize the passenger train industry, but need to determine the appropriate financing method. Several options are available including a leveraged lease proposed by Bank of New York Capital Funding (BNYCF), to borrow money to fund the purchase, or to rely on government funding (Bruner). After our analysis of these options, we have decided to select the leveraged lease option provided by BNYCF.

Government Funding
The first option we looked at was using government funding to finance the project. This option would be the least expensive, but management felt this grant money would be needed for other projects that might be hard to obtain funding for. Therefore, we decided to reject this financing option.

Next, we looked at several advantages of the lease option. A financial lease is a long-term rental agreement between two parties, a lessee and a lessor. The lessee makes payments and receives the right to use the asset, while the lessor owns the asset and receives rental payments. A major benefit of leasing is that the payments are entirely expensed on the income statement, which makes them tax deductible. Another advantage to leasing involves the timing of the lease payments. Lease payments can be adapted to better fit the lease as compared to the fixed payment of a fully amortizing loan.

Borrow and Buy
There are also some advantages to borrowing and buying an asset,...
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