Name :Tanuj Kumar Kukreti

Roll no: B17117

Assignment-2: Amtrak

Case Background

Amtrak also known as National Railroad Passenger Corporation was created by mandation of US
government. It had since then become the primary provider of the railroad service in the United
States of America. Amtrak provided Service to mora than 20 million intercity passengers and
operated 516 stations in 44 states. While Amtrak used to receive federal subsidies from the US
government, it as stipulated that the federal subsidies will be stopped by 2002. Historically ,
Amtrak had never been profitable. For a turn around , Amtrak was looking for some viable
options.

Amtrak decided to develop a high speed service called Acela with a top speed of 150 miles an
hour. However for this specialized service, Amtrak had to procure specialized equipments. The
total cost of these equipments turned out to be 750 Million dollars. These assets had a useful life
of 25 years and salvage value of 15% of the original cost. Amtrak used straight line depreciation
for accounting purpose and 7-year MACRS for tax period. Corporate income tax rate was 38%.
Financing for some parts had already been arranged and a financing of $267.9 million is to be
required for which the leveraged-lease proposal. A total of three options were available for
Amtrak:

Borrow and buy:-

An underwriting of a bond with a major bank with a 20 year term at 6.75% per annum. The
semi-annual payments of $12.303 million, beginning in December 1999. The locomotives and
train sets would serve as collateral for loan.

Lease

BNYCF had proposed a lease based structure for the transaction. BNC capital funding will act as
a lessor and provide equity funds. Debt will come from Export Development Corporation(EDC)
of Canada and will provide 80% of the required funds. The remaining will be provided by the
BNYCF. The equity and debt funds on closing would flow through Wilmington Trust, an
independent third party to the transaction that acted as owner-trustee.

Relying on the federal sources

Amtrak can use federal monies to fund the Acela equipment purchases. The federal funding
could only be used for Capital appropriations. The acquisition of acela equipment can be
theoretically considered a capital asset acquisition and as such these grants could be used to buy
them. However, Amtrak would like to use these federal grants for projects that cannot be easily
financed, such as safety, right of way and infrastructure related projects.
 Name :Tanuj Kumar Kukreti
Roll no: B17117
Assignment-2: Amtrak

Major Problems

Risk: Amtrak has introduced a high-speed service in US with all the comfort and host of
other services that comes with it. It remains to be seen whether there is an appropriate
market for such a service in the US, whether Amtrak will be able to breakeven in a
reasonable amount of time. If that is not the case, then Amtrak could be in huge financial
loss.
Withdrawal of government Subsidies
While the firm had been on government subsidies for a considerable period , it was
highly probable that these will be eliminated by 2002. In 1998, federal subsidies were
$426 Millions vis a vis loss of $504 Million. Eliminating them will almost result in a
100% jump in losses.
Financial Position
Amtrak has constantly made losses from 1994 (331 Million) to 1998 (504 Million).
Losses have only increased all these years. Total federal grants have come down from
502 Million to 426 Million. This has been a significant factor in the piling up of losses.
Future Prospects
The projected revenue generation from this new project is around $180 million which is
simply not enough to cover their losses amounting to around $500 Million per annum .
Low debt-equity ratio
In the balance sheet FY 1998, Amtrak has a total debt of USD 1,535 million. The debt to
equity ratio is around 35%. The market is already saturated with Amtrak paper. The debt-
equity ratio is very low.They have been highly dependent on cost of equity which is
generally higher than the cost of debt.

Analysis and solution:

Total financing: $267,900,000

Life of procurement equipment: 25 years
Residual value is 15% = 267900000*.15=$40,185,000
Depreciation Method: Straight line
Depreciation Period: 25 years
Depreciation for tax purposes: 7 year MACRS
Semi-Annual Rd: 3.38%
Annual Rd: 6.75%
 Name :Tanuj Kumar Kukreti
Roll no: B17117
Assignment-2: Amtrak

Terminal Value: 15%

Terminal Value: 267900000*.15=$40,185,000

Depreciation Period: 25 years

Tax rate: 38%

Option 1: Borrow & Buy

Bond term: 20 years
Interest rate: 6.75%
Semi-annual payments: $12.303 million
Beginning : December 1999
Collateral: Train sets and locomotives
Limitation: Amtrak has recently issues debt and the market might be saturated with the existing
Amtrak papers
If the Amtrak decide to purchase the the locomotives and the train set it will reflect on the
balance sheet. The PPE on the assets side will increase by $267.9 million and debt on the
liabilities side will increase by $267.9 million. Amtrak will record straight line depreciation, pay
interest on the loan and repay the principal amount.

Option 2: Lease
Lessor: BNY Capital Funding LLC
Equity funds: 20% of the equipment value = .2*267900000=$53,580,000
Lender: Export Development Corporation (EDC) of Canada
Debt funds: 80% = .8*267900000= $214,320,000
Trustee: Wilmington Trust
At the end of the lease Amtrak had an option to buy the equipment from BNYCF at the higher of
terminal or fair market value.Amtrak also had an option of early-buyout option where it can buy
the equipment from BNYCF in 2017 for USD 126.6 million.
The Trust will lend the equipment to Amtrak and in return it will take the semiannual lease
payments from Amtrak. These lease payments will be first used to service the debt given by
 Name :Tanuj Kumar Kukreti
Roll no: B17117
Assignment-2: Amtrak

EDC of Canada( as per the contract) and the remaining lease payments post debt service will be
given to BNYCF.
The company is making losses so there is no tax shield.

Option 3: Rely on Federal Grants

Amtrak could use the federal grants. However as already mentioned, the Amtrak would like to
use this only for the projects where the funding is not easily available. Hence this option is ruled
out
Recommendations:

Options NPV (in $)

Option 1 Loan -2,16,06,399
Option 2.a Lease Buyback 2,92,51,425
Option 2.b Lease No Buyback 4,76,36,748
Option 2.c Lease Early Buyback 2,72,89,935

The NPV is highest in the case of Option 2.b to lease the equipments till 2020 with NPV = $47
million. It also gives the firm the options to buyback or early buyback.
Option 1:

Bond Cash Flows PV of Bond Cash Flows

1,23,03,000 1,19,57,430
1,23,03,000 1,16,21,567
1,23,03,000 1,12,95,138
1,23,03,000 1,09,77,877
1,23,03,000 1,06,69,528
1,23,03,000 1,03,69,839
1,23,03,000 1,00,78,569
1,23,03,000 97,95,479
1,23,03,000 95,20,341
1,23,03,000 92,52,932
1,23,03,000 89,93,033
1,23,03,000 87,40,434
1,23,03,000 84,94,931
1,23,03,000 82,56,323
1,23,03,000 80,24,417
1,23,03,000 77,99,026
1,23,03,000 75,79,965
 Name :Tanuj Kumar Kukreti
Roll no: B17117
Assignment-2: Amtrak

1,23,03,000 73,67,057
1,23,03,000 71,60,129
1,23,03,000 69,59,014
1,23,03,000 67,63,547
1,23,03,000 65,73,571
1,23,03,000 63,88,931
1,23,03,000 62,09,477
1,23,03,000 60,35,063
1,23,03,000 58,65,549
1,23,03,000 57,00,796
1,23,03,000 55,40,671
1,23,03,000 53,85,043
1,23,03,000 52,33,787
1,23,03,000 50,86,779
1,23,03,000 49,43,900
1,23,03,000 48,05,034
1,23,03,000 46,70,069
1,23,03,000 45,38,895
1,23,03,000 44,11,406
1,23,03,000 42,87,497
1,23,03,000 41,67,069
1,23,03,000 40,50,023
1,23,03,000 39,36,265
49,21,20,000 28,95,06,399

Option 2.a:

CF
Period Year Month Equipment CF Lease PV NPV
0 1999 June 26,79,00,000 0 26,79,00,000 2,92,51,425
1 1999 December -2,00,102 -1,93,569
2 2000 June -37,61,228 -35,19,643
3 2000 December -79,65,652 -72,10,656
-
4 2001 June 1,00,22,594 -87,76,433
-
5 2001 December 1,03,16,948 -87,39,239
6 2002 June -86,17,634 -70,61,467
-
7 2002 December 1,03,60,645 -82,12,552
8 2003 June -98,28,570 -75,36,439
-
9 2003 December 1,03,67,985 -76,90,502
 Name :Tanuj Kumar Kukreti
Roll no: B17117
Assignment-2: Amtrak

10 2004 June -86,07,823 -61,76,438

-
11 2004 December 1,04,18,573 -72,31,652
12 2005 June -96,83,063 -65,01,694
-
13 2005 December 1,04,35,186 -67,77,950
14 2006 June -85,80,151 -53,91,103
-
15 2006 December 1,15,99,993 -70,50,581
16 2007 June -73,38,339 -43,14,688
-
17 2007 December 1,14,68,211 -65,22,766
18 2008 June -94,75,208 -52,13,260
-
19 2008 December 1,57,92,709 -84,05,464
20 2009 June -77,65,741 -39,98,273
-
21 2009 December 2,02,24,322 -1,00,72,749
22 2010 June -50,67,035 -24,41,251
-
23 2010 December 1,58,72,556 -73,97,583
24 2011 June -41,21,823 -18,58,304
-
25 2011 December 2,28,07,129 -99,46,781
26 2012 June -33,36,587 -14,07,663
-
27 2012 December 2,36,45,133 -96,49,897
28 2013 June -26,62,913 -10,51,290
-
29 2013 December 2,40,55,367 -91,86,749
30 2014 June -19,57,919 -7,23,318
-
31 2014 December 2,00,17,608 -71,53,704
32 2015 June -60,67,613 -20,97,593
33 2015 December -62,87,652 -21,02,695
-
34 2016 June 1,22,92,315 -39,76,545
-
35 2016 December 2,13,94,788 -66,95,218
36 2017 June -65,51,924 -19,83,399
-
37 2017 December 1,81,07,167 -53,02,445
38 2018 June -86,12,133 -24,39,613
 Name :Tanuj Kumar Kukreti
Roll no: B17117
Assignment-2: Amtrak

-
39 2018 December 1,34,69,295 -36,90,961
40 2019 June -88,64,543 -23,49,825
41 2019 December -66,54,238 -17,06,326
42 2020 June -20,35,748 -5,04,978

43 2020 December $(7,66,19,400) -1 -1,83,85,324

Option 2.b:

CF
Period Year Month Equipment CF Lease PV NPV
0 1999 June 26,79,00,000 0 26,79,00,000 4,76,36,748
1 1999 December -2,00,102 -1,93,569
2 2000 June -37,61,228 -35,19,643
3 2000 December -79,65,652 -72,10,656
-
4 2001 June 1,00,22,594 -87,76,433
-
5 2001 December 1,03,16,948 -87,39,239
6 2002 June -86,17,634 -70,61,467
-
7 2002 December 1,03,60,645 -82,12,552
8 2003 June -98,28,570 -75,36,439
-
9 2003 December 1,03,67,985 -76,90,502
10 2004 June -86,07,823 -61,76,438
-
11 2004 December 1,04,18,573 -72,31,652
12 2005 June -96,83,063 -65,01,694
-
13 2005 December 1,04,35,186 -67,77,950
14 2006 June -85,80,151 -53,91,103
-
15 2006 December 1,15,99,993 -70,50,581
16 2007 June -73,38,339 -43,14,688
-
17 2007 December 1,14,68,211 -65,22,766
18 2008 June -94,75,208 -52,13,260
-
19 2008 December 1,57,92,709 -84,05,464
 Name :Tanuj Kumar Kukreti
Roll no: B17117
Assignment-2: Amtrak

20 2009 June -77,65,741 -39,98,273

-
21 2009 December 2,02,24,322 -1,00,72,749
22 2010 June -50,67,035 -24,41,251
-
23 2010 December 1,58,72,556 -73,97,583
24 2011 June -41,21,823 -18,58,304
-
25 2011 December 2,28,07,129 -99,46,781
26 2012 June -33,36,587 -14,07,663
-
27 2012 December 2,36,45,133 -96,49,897
28 2013 June -26,62,913 -10,51,290
-
29 2013 December 2,40,55,367 -91,86,749
30 2014 June -19,57,919 -7,23,318
-
31 2014 December 2,00,17,608 -71,53,704
32 2015 June -60,67,613 -20,97,593
33 2015 December -62,87,652 -21,02,695
-
34 2016 June 1,22,92,315 -39,76,545
-
35 2016 December 2,13,94,788 -66,95,218
36 2017 June -65,51,924 -19,83,399
-
37 2017 December 1,81,07,167 -53,02,445
38 2018 June -86,12,133 -24,39,613
-
39 2018 December 1,34,69,295 -36,90,961
40 2019 June -88,64,543 -23,49,825
41 2019 December -66,54,238 -17,06,326
42 2020 June -20,35,748 -5,04,978
43 2020 December -1 0

Option 2.c:

Period Year Month CF Equipment CF Lease PV NPV

0 1999 June 26,79,00,000 0 26,79,00,000 2,72,89,935
1 1999 December -2,00,102 -1,93,569
2 2000 June -37,61,228 -35,19,643
3 2000 December -79,65,652 -72,10,656
4 2001 June - -87,76,433
 Name :Tanuj Kumar Kukreti
Roll no: B17117
Assignment-2: Amtrak

1,00,22,594
-
5 2001 December 1,03,16,948 -87,39,239
6 2002 June -86,17,634 -70,61,467
-
7 2002 December 1,03,60,645 -82,12,552
8 2003 June -98,28,570 -75,36,439
-
9 2003 December 1,03,67,985 -76,90,502
10 2004 June -86,07,823 -61,76,438
-
11 2004 December 1,04,18,573 -72,31,652
12 2005 June -96,83,063 -65,01,694
-
13 2005 December 1,04,35,186 -67,77,950
14 2006 June -85,80,151 -53,91,103
-
15 2006 December 1,15,99,993 -70,50,581
16 2007 June -73,38,339 -43,14,688
-
17 2007 December 1,14,68,211 -65,22,766
18 2008 June -94,75,208 -52,13,260
-
19 2008 December 1,57,92,709 -84,05,464
20 2009 June -77,65,741 -39,98,273
-
21 2009 December 2,02,24,322 -1,00,72,749
22 2010 June -50,67,035 -24,41,251
-
23 2010 December 1,58,72,556 -73,97,583
24 2011 June -41,21,823 -18,58,304
-
25 2011 December 2,28,07,129 -99,46,781
26 2012 June -33,36,587 -14,07,663
-
27 2012 December 2,36,45,133 -96,49,897
28 2013 June -26,62,913 -10,51,290
-
29 2013 December 2,40,55,367 -91,86,749
30 2014 June -19,57,919 -7,23,318
-
31 2014 December 2,00,17,608 -71,53,704
32 2015 June -60,67,613 -20,97,593
 Name :Tanuj Kumar Kukreti
Roll no: B17117
Assignment-2: Amtrak

33 2015 December -62,87,652 -21,02,695

-
34 2016 June 1,22,92,315 -39,76,545
-
35 2016 December 2,13,94,788 -66,95,218

36 2017 June $(12,66,00,000) 0 -3,83,24,358

37 2017 December 0 0
38 2018 June 0 0
39 2018 December 0 0
40 2019 June 0 0
41 2019 December 0 0
42 2020 June 0 0
43 2020 December 0 0