NATIONAL RAILROAD PASSENGER CORPORATION (AMTRAK): ACELA FINANCING Teaching Note (Adapted from the Darden School of Business)

In the late 1990s, the National Railroad Passenger Corporation (Amtrak) faced a rude awakening as the U.S. Congress stipulated that Amtrak eliminate its reliance on federal subsidies by 2002. In response, Amtrak drew up a plan for self-sufficiency, the centerpiece of which was a new, high-speed passenger service that it hoped would boost revenue enough to make Amtrak selfsufficient by 2002.To run this new service, Amtrak needed to purchase $750 million worth of new locomotives and train cars in 1999. Three alternatives were available for funding the purchase: debt financing, lease financing, or reliance on federal sources. The case opens in April 1999, with Amtraks Chief Financial Officer (CFO) Arlene Friner instructing her staff to review a leveraged-lease proposal that has just been submitted by BNY Capital Funding LLC (BNYCF). The objectives of the case are to: Introduce students to financial leases as a financing alternative. Explore the lease-versus-buy decision and the conditions under which financial lease arrangements make sense. Exercise skills in the valuation of financial leases.

Suggested Questions: 1. What is a financial lease? How does a financial lease work? What advantages or disadvantages does it have over debt and vice versa? 2. What are the advantages and disadvantages of each of the three financing alternatives given in the case? 3. Which alternative did you choose? Why? Provide quantitative support for your answer. 4. What does a sensitivity analysis show? What are the key bets in the decision?