Executive Summary Statement of the Problem In April 1999, the National Railroad Passenger Corporation (Amtrak) is reviewing financing

plans for the acquisition of equipment for Amtraks new train service, Acela. By 2002, the government will restrict Amtrak from using federal funds for operating expenses. In response, Amtrak has decided to roll out Acela, a new customer service oriented, high speed train line that will service the Northeast United States and is projected to bring in $180 million in revenues by 2002. They require $267.9 million to fund six locomotives and seven train sets. Assuming that Amtrak will be profitable by 2002, they have three options to acquire the equipment: 1) issue debt to finance the purchase, 2) lease the equipment using a leveraged-lease structure, or 3) use federal grant monies. A discounted cash flow analysis on the three options has been performed to determine the most cost-efficient alternative. Discussion Amtrak has the option to issue bonds with a 20-year term at 6.75% per annum to purchase the equipment outright. They would make semiannual payments of $12.303 million and can sell the equipment at the end of its 25-year useful life at $40.185 million. Assuming that Amtrak will soon become profitable and reap the benefit of a tax shield, the present value of cost of this option would be approximately $164.77 million. Amtrak is also considering an 80/20 debt-to-equity leveraged-lease structure to finance the locomotives and train sets. Amtrak would make semiannual payments at a discount rate of 6.75% and has the option to buy the equipment from the equity investor, BNY Capital Funding LLC (BNYCF), at the end of the lease term. The leveraged-lease structure has a present value of cost of $173.9 million. Amtrak also has an early-buyout option to purchase the equipment from BNYCF in 2017 for $126.6 million. The present value of this early-buyout option is $2.97 million, bringing the cost of the leveraged lease down to $170.93 million. Congress has agreed to continue funding Amtrak for capital appropriations, so a federal grant can be used to purchase the Acela equipment. However, Amtrak values the federal grants as a premium commodity that they would prefer to use on more difficult-to-finance capital projects. Because the Acela train sets and other stock can be efficiently financed through the capital markets, Amtrak has decided that they would rather purchase or lease the equipment per the options detailed above. Recommendation Amtrak should issue bonds to fund the outright purchase of the train equipment. Though Amtrak is currently operating at a loss, the launch of the Acela high-speed line is expected to bring in over $180 million in revenues by 2002. They would become profitable as well as subject to an income tax rate of 38%. By purchasing the equipment instead of leasing, Amtrak will be able to take advantage of both a depreciation and interest tax shield, making the cost of purchasing the equipment $6.16 million cheaper than implementing a leveraged-lease. On a strict cost based analysis, borrowing money to finance the purchase of the equipment would be the optimal choice.