Deciding

in Financing Alterna/ves
Case: Na/onal Rail Passenger
Corpora/on (Amtrak): Acela
Financing

Balance Sheet (Values in Million of USD)

Fy Ending Fy Ending
Sept 30, 1998 Sept 30, 1998
Current Assets
Cash and equivalents
274.7
4
Temporary cash investments
409.7
6
Account receivable, net
88.7
1
Mtaerials and supplies
91.6
1
Other current assets
3.4
0
Total current assets
868.1
12
Property, plant and equipment
9456.4
129
Less: Accumulated depreciation
-3106.9
-43
Net property, plant and equipment
6349.5
87
Other assets and deffered charges
87.6
1
Total assets
7305.2
100

Balance Sheet (Values in Million of USD)

Fy Ending Fy Ending
Sept 30, 1998 Sept 30, 1998
Current liabilities
Accounts payable
Accrued expenses and other current liabilities
Deffered ticket revenue
Current maturities of LT debt and capital-lease obligations
Total current liabilities
LT debt and capital lease obligations
Capital lease obligations
Equipment and other debt
Other liabilities and deffered credit
Deferred federal payments
Casuality reserves
Postretirement employee-benefits obligation
Environmental reserve
Advances from railroads and commuter agencies
Other
Total liabilities
Capitalization
Preffered stock
Common stock
Other paid-in capital
Accumulated comprehensive loss
Total liabilities and capitalization

270.8
186.7
61.4
102.2
621.1

4
3
1
1
9

1213.1
322.5
1535.6

17
4
21

457
136.2
118.4
35.4
20.6
1.5
769.1
2925.8

6
2
2
0
0
0
11
40

10939.7
93.9
6471.3
-13125.4
4379.5
7305.3

150
1
89
-180
60
2 100

Income Statement (Values in Millions of USD)

Fiscal Year Ending Sept. 30
1994 1995 1996 1997 1998
Revenues
Passenger-related and other
Commuter
Reimbursable
Federal payments
Total revenues
Expenses
Salaries, wage and benefits
Train operations
Facility and office related
Maintenance-of-way goods and services
Advertising and sales
Interest
Depreciation and amortization
Other
One-time charges/(gains)
Total expenses
Operating income/(loss)
Exclude federal payments and related interest
Operating loss restated
Federal grants
Federal operating grant
Excess railroad retirement taxes
Federal capital - interest
Federal capital - progressive overhaul and other
Total federal grants
Net loss

1152
184
77

1177
213
107

1213 1341 1392

234 242 260
108
91
91
542
1413 1497 1555 1674 2285
1330 1241 1236 1299 1448
358 321 321 365 356
153 172 181 187 190
45
73
59
46
52
91
90 109
98 102
185 144 149 160 181
245 230 238 242 294
83
34
25
39
15
-244
2246 2305 2318 2436 2638
-833 -808 -763 -762 -353
577
-833 -808 -763 -762 -930
352
150

392
150

285
120

223 202
142 142
42
36
37
82
502 542 441 444 426
-331 -266 -322 -318 -504

Income Statement (Values in Millions of USD)

Fiscal Year Ending Sept. 30
1994 1995 1996 1997 1998
Revenues
Passenger-related and other
Commuter
Reimbursable
Federal payments
Total revenues
Expenses
Salaries, wage and benefits
Train operations
Facility and office related
Maintenance-of-way goods and services
Advertising and sales
Interest
Depreciation and amortization
Other
One-time charges/(gains)
Total expenses
Operating income/(loss)
Exclude federal payments and related interest
Operating loss restated
Federal grants
Federal operating grant
Excess railroad retirement taxes
Federal capital - interest
Federal capital - progressive overhaul and other
Total federal grants
Net loss

82
13
5

79
14
7

78
15
7

80
14
5

100

100

100

100

61
11
4
24
100

94
25
11
3
6
13
17
6
-17
159
-59

83
21
11
5
6
10
15
2

79
21
12
4
7
10
15
2

78
22
11
3
6
10
14
2

63
16
8
2
4
8
13
1

154
-54

149
-49

146
-46

-59

-54

-49

-46

115
-15
25
-41

25
11

26
10

18
8

36
-18

2
28
-21

13
8
3
2
27
-193

36
-23

9
6
4
19
-22

Equipment

No.
High-speed locomotives
15
Train sets
20

Es/mated life: 25
years

Residual values:
~15% of original
equipment cost

Cost
Aggregate Cost
7,161,300
107,419,500
32,129,050
642,581,000
Total 750,000,500
Deprecia/on as per..,
Accoun/ng purpose:
straight-line
Tax purposes: 7-year
MACRS

Funds to be arranged
for $267.9 million
(Locomo/ves: 6 and
Train sets: 7)

BNCYFs
Leveraged-Lease
proposal

Borrow
Government
Funding
5

Benets

Leasing 100%
nancing

Oers cash ow
benets

O balance sheet
nancing

Avoidance of loan
covenants

Tax planning

Crea/on of
working capital

Hedge against risk

of ina/on and
obsolescence

Fast and exible

nancing

To over come
monopoly act

Used in non-
priority sector
and service sector

Possibility of
evading capital-
expenditures

To avoid capital-
approval
procedures
6

No cost on
Benets asset disposal
Provides term
of use of
equipment

Preserves line
of credit
Permits
accurate
budge/ng

No Asset
Management
7

Crea/ng More
Value for Lease

Tax rate dierences

between lessor and
lessee

Realizing deprecia/on
deduc/on by lessor and
lessee

Asset acquisi/on and

maintenance cost
specializa/on or scale of
economies

Realizing salvage values

superiority of
property knowledge

Leverage abili/es
between lessor and
lessee dierence in
interest deduc/bility

Lifle op/ons holding

signicant value

Lessor can purchase

equipment more cost
eec/vely; tax
deduc/ons for Interest
and Deprecia/on

Tailored to meet
lessors needs heavier
payments in Dec than in
June
8

Benets to
Lessor

Addi/onal
nancial
product

Reduces risk

Increases
protability

Accelerates
sales

Higher
leverage
[Max. of 10:1]

No gesta/on
period

Low cost of
opera/ons
9

Federal
Sources

Can use fed fund for equipment

purchases

No federal subsidies for opera/ng

expenses

Congress agreed to fund for capital

appropria/ons

Fed grants considered as premium

and precious commodity

Preferred to use grant money to fund

capital projects that could not be
easily and cost-eec/vely nanced
such as..,
Safety
Right-of-way
Infrastructure-related projects
Major overhauls

Train sets and other rolling stock,

could be very eciently nanced
through capital markets

10

Terms of
Borrowing

Major bank oered to

underwrite a bond

Term: 20-year

Coupon: 6.75 percent

per annum

Semiannual
payments: $12.303
million

Payment beginning:
Dec 1999

Collateral for the

loan: locomo/ves and
trains sets

Drawback
Had recently issued debt
Public market might
already be saturated with
Amtrak paper
11

BNY Capital Funding LLC's Proposed Leveraged-Lease Strcuture

Leveraged Lease

Lessee
Equipment

Equity investors put up $53.6

million (20% of equipment value)
in exchange for lease payments
after debt service

Equity Investor
BNY Capital Funding, LLC

Lease Payments

Proposed by: BNCYF

(Wholly owned subsidiary
of the Bank of New York)
Lenders advance $214.3
million (80% of equipment
value) in exchange for
first claim on lease
payments on locomotives
and trains ets

Owner Trustee
Wilmington Trust

Lender
Export Development
Corporation (EDC) of
Canada

Lessor: BNCYF (BNCYF:

20% of required funds;
would receive lease
payments only aper
debtor had been paid)
Sole lender and debt
provider: Export
Development Corpora/on
(EDC) of Canada (EDC:
80% of required funds)

12

Leveraged
Lease
Basic documents
used in
Leveraged Lease
>

Par/cipa/on
agreement
signed by all
par/es

Trust agreement

Indenture trust

Lease agreement for tax shield

associated with asset ownership and
residual value of asset

Assets Suitable for

Leveraged Lease >
Airplane

Satellites

Ships

Rails

O-shore
drinking

Nuclear
machines

Power
genera/on
plants

Large chemical
plants

Gas pipe lines

SD of market-value uctua2ons of train

sets and locomo2ves: 25%
17-year risk-free rate: 5.78%
Amtrak WACC: 11.8%

BNY Capital Funding LLC's Proposed

Lease-Payment Schedule (in Dollars)
Date Due
Amount
1999
June
.
Dec
$200,102
2000
June
$3,761,228
Dec
$7,965,652
2001
June
$10,022,594
Dec
$10,316,948
2002
June
$8,617,634
Dec
$10,360,645
2003
June
$9,828,570
Dec
$10,367,985
2004
June
$8,607,823
Dec
$10,418,573
2005
June
$9,683,063
Dec
$10,435,186
2006
June
$8,580,151
Dec
$11,599,993
2007
June
$7,338,339
Dec
$11,468,211
2008
June
$9,475,208
Dec
$15,792,709
2009
June
$7,765,741
Dec
$20,224,322
2010
June
$5,067,035
Dec
$15,872,556
2011
June
$4,121,823
Dec
$22,807,129
2012
June
$3,336,587
Dec
$23,645,133
2013
June
$2,662,913
Dec
$24,055,367
2014
June
$1,957,919
Dec
$20,017,608
2015
June
$6,067,613
Dec
$6,287,652
2016
June
$12,292,315
Dec
$21,394,788
2017
June
$6,551,924
Dec
$18,107,167
2018
June
$8,612,133
Dec
$13,469,295
2019
June
$8,864,543
Dec
$6,654,238
2020
June
$2,035,748
Dec
$1

13

Financial Lease

Types >

Direct leases - Lessor

purchased equipment
or asset and rented it
out to lessee

Sale-and-leaseback

Leveraged leases

Cross border
(interna/onal) lease

Foreign to foreign
lease

Criteria
Total lease rental >
asset price

Irrevocable by both
par/es

Also called capital

lease

Lease period = life of

asset

Purpose: nancing an
asset

Lessee bears:
maintenance,
insurance, taxes

Ownership test:
ownership transferred
to lessee at the end of
lease

Alterna/ve ownership
test: lessee has right to
buy asset at a price
substan/ally below fair
market price

Economic life test:

lease term >= 75% of
es/mated economic life
of the asset

Value test: PV of
minimum lease
payment >= 90% of fair
market value of asset at
the /me of lease

Min lease rental = rate ~ equal

to lessee marginal cost of debt
Payout will include; asset cost,
cost of nancing, lessor
overhead, rate of return
Similar to mortgage loans
14

Opera/ng Lease
No xed future
commitment

Cancelable by
lessee on no/ce

Purpose: using
an asset

Lessor bears:
maintenance,
insurance, taxes
15

Direct Lease
Hybrid of
opera/ng and
nancial lease

Payout will not

include; Repairs,
Maintenance, and
Taxes

Dura/on: 3 or
more years

Lessor holds the

/tle

At expira/on:
lessee may renew
or purchase

Full payout

16

Types of Leases
Master lease: blanket
leasing

Percentage lease: at
rental + addi/onal
rental over and above
a revenue

Wet and dry lease

used in airline
industry

Triple net lease net

of insurance,
maintenance, taxes.

Closed end and open

end lease ownership
possibili/es opened to
lessee

Swap lease
exchange assets in
need of major repairs

Full pay-out lease

True lease fully goes

with the local rules
and regula/ons of a
country

Wash lease tax

benet transferred to
investor

Upgrade lease used

in obsolescence

Capital lease to
transfer ownership to
lessee at the end of
lease term

Employee lease
transferring
employees to Lessor
and leasing it back

17

Lease vs. Buying

Increases companys debt
capacity

Public market is saturated

with Amtrak debt

Also includes interest

component

Investors will not recognize

a nancial lease liability as
a form of debt? Liabili/es:
PV of nancial lease
payments and Assets: PV of
nancial lease payments

Possibility of increasing
book income buy avoiding
deprecia/on and interest? -
Lease payments includes
deprecia/on and interest

In world of no taxes;
leasing = borrow-and-buy

Lease amount higher or

lower indierence point
would result in value
destruc/on for both par/es

18

NPV Analysis of Lease

Cash ows

Discount rate

Ouwlow: lease payments

No tax shields on lease payments
Amtrak has no tax benets
Not en/tled for residual value of
$40.2 million

WACC: 11.8%
Interest rate: 6.75% - appropriate
rate to be used

19

Cash Flow Analysis of Lease Alternative (in Million Dollars)

Discount rate
Tax rate
After-tax interest rate
Lease payments
Tax shield on lease payments
After-tax lease payments
Residual value
Total cash flows
Discounted flows @ K D
Lease payments
Tax shield on lease payments
After-tax lease payments
Residual value
Total cash flows
Discounted flows @ K D
Lease payments
Tax shield on lease payments
After-tax lease payments
Residual value
Total cash flows
Discounted flows @ K D
Time Period
Lease payments
Tax shield on lease payments
After-tax lease payments
Residual value
Total cash flows
Discounted flows @ K D
Time Period
Lease payments
Tax shield on lease payments
After-tax lease payments
Residual value
Total cash flows
Discounted flows @ K D
NPV of Lease Alternative

6.75%
0.00%
6.75%
0

1
(0.20)
0.00
(0.20)

2
(3.76)
0.00
(3.76)

3
(7.97)
0.00
(7.97)

4
(10.02)
0.00
(10.02)

5
(10.32)
0.00
(10.32)

6
(8.62)
0.00
(8.62)

7
(10.36)
0.00
(10.36)

8
(9.83)
0.00
(9.83)

9
(10.37)
0.00
(10.37)

10
(8.61)
0.00
(8.61)

(0.20)
(0.19)
11
(10.42)
0.00
(10.42)

(3.76)
(3.52)
12
(9.68)
0.00
(9.68)

(7.97)
(7.21)
13
(10.44)
0.00
(10.44)

(10.02)
(8.78)
14
(8.58)
0.00
(8.58)

(10.32)
(8.74)
15
(11.60)
0.00
(11.60)

(8.62)
(7.06)
16
(7.34)
0.00
(7.34)

(10.36)
(8.21)
17
(11.47)
0.00
(11.47)

(9.83)
(7.54)
18
(9.48)
0.00
(9.48)

(10.37)
(7.69)
19
(15.79)
0.00
(15.79)

(8.61)
(6.18)
20
(7.77)
0.00
(7.77)

(10.42)
(7.23)
21
(20.22)
0.00
(20.22)

(9.68)
(6.50)
22
(5.07)
0.00
(5.07)

(10.44)
(6.78)
23
(15.87)
0.00
(15.87)

(8.58)
(5.39)
24
(4.12)
0.00
(4.12)

(11.60)
(7.05)
25
(22.81)
0.00
(22.81)

(7.34)
(4.31)
26
(3.34)
0.00
(3.34)

(11.47)
(6.52)
27
(23.65)
0.00
(23.65)

(9.48)
(5.21)
28
(2.66)
0.00
(2.66)

(15.79)
(8.41)
29
(24.06)
0.00
(24.06)

(7.77)
(4.00)
30
(1.96)
0.00
(1.96)

(20.22)
(10.07)
31
(20.02)
0.00
(20.02)

(5.07)
(2.44)
32
(6.07)
0.00
(6.07)

(15.87)
(7.40)
33
(6.29)
0.00
(6.29)

(4.12)
(1.86)
34
(12.29)
0.00
(12.29)

(22.81)
(9.95)
35
(21.39)
0.00
(21.39)

(3.34)
(1.41)
36
(6.55)
0.00
(6.55)

(23.65)
(9.65)
37
(18.11)
0.00
(18.11)

(2.66)
(1.05)
38
(8.61)
0.00
(8.61)

(24.06)
(9.19)
39
(13.47)
0.00
(13.47)

(1.96)
(0.72)
40
(8.86)
0.00
(8.86)

(20.02)
(7.15)
41
(6.65)
0.00
(6.65)

(6.07)
(2.10)
42
(2.04)
0.00
(2.04)

(6.29)
(2.10)
43
(0.00)
0.00
(0.00)

(12.29)
(3.98)
44

(21.39)
(6.70)
45

(6.55)
(1.98)
46

(18.11)
(5.30)
47

(8.61)
(2.44)
48

(13.47)
(3.69)
49

(8.86)
(2.35)
50

(6.65)
(1.71)

(2.04)
(0.50)

(0.00)
(0.00)

0.00
0.00

0.00
0.00

0.00
0.00

0.00
0.00

0.00
0.00

0.00
0.00

0.00
0.00

(220.26)

20

Discount rate
Tax rate
After-tax interest rate
Useful life of equipment
Debt
Purchase of equipment
Principal repayment
Interest expense
Interest tax shields
Depreciation tax shield
Residual value
Total cash flows
Discounted flows @ KD
Principal repayment
Interest expense
Interest tax shields
Depreciation tax shield
Residual value
Total cash flows
Discounted flows @ KD
Principal repayment
Interest expense
Interest tax shields
Depreciation tax shield
Residual value
Total cash flows
Discounted flows @ KD
Principal repayment
Interest expense
Interest tax shields
Depreciation tax shield
Residual value
Total cash flows
Discounted flows @ KD
Principal repayment
Interest expense
Interest tax shields
Depreciation tax shield
Residual value
Total cash flows
Discounted flows @ KD
NPV of Borrow-and-Buy

Cash Flow Analysis of Borrow-and-Buy Alternative (In Million Dollars)

6.75%
0.00%
6.75%
25
0
1
2
3
4
5
6
7
8
267.90
(267.90)
(3.26)
(3.37)
(3.49)
(3.60)
(3.72)
(3.85)
(3.98)
(4.11)
(9.04)
(8.93)
(8.82)
(8.70)
(8.58)
(8.45)
(8.32)
(8.19)
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00

10

(4.25)
(8.05)
0.00
0.00

(4.40)
(7.91)
0.00
0.00

(12.30)
(11.90)
11
(4.55)
(7.76)
0.00
0.00

(12.30)
(11.51)
12
(4.70)
(7.60)
0.00
0.00

(12.30)
(11.14)
13
(4.86)
(7.45)
0.00
0.00

(12.30)
(10.77)
14
(5.02)
(7.28)
0.00
0.00

(12.30)
(10.42)
15
(5.19)
(7.11)
0.00

(12.30)
(10.08)
16
(5.37)
(6.94)
0.00

(12.30)
(9.75)
17
(5.55)
(6.76)
0.00

(12.30)
(9.43)
18
(5.73)
(6.57)
0.00

(12.30)
(9.13)
19
(5.93)
(6.38)
0.00

(12.30)
(8.83)
20
(6.13)
(6.18)
0.00

(12.30)
(8.54)
21
(6.33)
(5.97)
0.00

(12.30)
(8.26)
22
(6.55)
(5.75)
0.00

(12.30)
(7.99)
23
(6.77)
(5.53)
0.00

(12.30)
(7.73)
24
(7.00)
(5.31)
0.00

(12.30)
(7.48)
25
(7.23)
(5.07)
0.00

(12.30)
(7.23)
26
(7.48)
(4.83)
0.00

(12.30)
(7.00)
27
(7.73)
(4.57)
0.00

(12.30)
(6.77)
28
(7.99)
(4.31)
0.00

(12.30)
(6.55)
29
(8.26)
(4.04)
0.00

(12.30)
(6.33)
30
(8.54)
(3.76)
0.00

(12.30)
(6.13)
31
(8.83)
(3.48)
0.00

(12.30)
(5.93)
32
(9.13)
(3.18)
0.00

(12.30)
(5.73)
33
(9.43)
(2.87)
0.00

(12.30)
(5.55)
34
(9.75)
(2.55)
0.00

(12.30)
(5.37)
35
(10.08)
(2.22)
0.00

(12.30)
(5.19)
36
(10.42)
(1.88)
0.00

(12.30)
(5.02)
37
(10.77)
(1.53)
0.00

(12.30)
(4.86)
38
(11.14)
(1.17)
0.00

(12.30)
(4.70)
39
(11.51)
(0.79)
0.00

(12.30)
(4.55)
40
(11.90)
(0.40)
0.00

(12.30)
(4.40)
41

(12.30)
(4.25)
42

(12.30)
(4.11)
43

(12.30)
(3.98)
44

(12.30)
(3.85)
45

(12.30)
(3.72)
46

(12.30)
(3.60)
47

(12.30)
(3.49)
48

(12.30)
(3.37)
49

(12.30)
(3.26)
50

0.00
0.00

0.00
0.00

0.00
0.00

0.00
0.00

0.00
0.00

0.00
0.00

0.00
0.00

0.00
0.00

0.00
0.00

40.19
40.19
7.64

(260.26)

Sums

(102.97)

(73.88)

(53.01)

(38.04)

7.64

22

NPV Analysis of Lease vs. Borrow-and-

Buy
NPV of interest and
principal repayment
cash ows discounted
by cost of debt will
result in cost of debt

Dierence in NPV

Residual value claim of

Amtrak at the end of
25 years

Leasing is superior
cheaper by $40 million

23

NPV Analysis of Lease vs.

Borrow-and-Buy
No Tax
Lease

Tax Rate of 38%

-$220.26 million -$173.90 million

Borrow-and-buy -$260.26 million -$171.51 million

25

Cash Flow Analysis of Lease Alternative (in Million Dollars)

Discount rate
Tax rate
After-tax interest rate
Lease payments
Tax shield on lease payments
After-tax lease payments
Residual value
Total cash flows
Discounted flows @ K D
Lease payments
Tax shield on lease payments
After-tax lease payments
Residual value
Total cash flows
Discounted flows @ K D
Lease payments
Tax shield on lease payments
After-tax lease payments
Residual value
Total cash flows
Discounted flows @ K D
Time Period
Lease payments
Tax shield on lease payments
After-tax lease payments
Residual value
Total cash flows
Discounted flows @ K D
Time Period
Lease payments
Tax shield on lease payments
After-tax lease payments
Residual value
Total cash flows
Discounted flows @ K D
NPV of Lease Alternative

6.75%
38.00%
4.19%
0

1
(0.20)
0.08
(0.12)

2
(3.76)
1.43
(2.33)

3
(7.97)
3.03
(4.94)

4
(10.02)
3.81
(6.21)

5
(10.32)
3.92
(6.40)

6
(8.62)
3.27
(5.34)

7
(10.36)
3.94
(6.42)

8
(9.83)
3.73
(6.09)

9
(10.37)
3.94
(6.43)

10
(8.61)
3.27
(5.34)

(0.12)
(0.12)
11
(10.42)
3.96
(6.46)

(2.33)
(2.24)
12
(9.68)
3.68
(6.00)

(4.94)
(4.64)
13
(10.44)
3.97
(6.47)

(6.21)
(5.72)
14
(8.58)
3.26
(5.32)

(6.40)
(5.77)
15
(11.60)
4.41
(7.19)

(5.34)
(4.72)
16
(7.34)
2.79
(4.55)

(6.42)
(5.56)
17
(11.47)
4.36
(7.11)

(6.09)
(5.16)
18
(9.48)
3.60
(5.87)

(6.43)
(5.34)
19
(15.79)
6.00
(9.79)

(5.34)
(4.34)
20
(7.77)
2.95
(4.81)

(6.46)
(5.14)
21
(20.22)
7.69
(12.54)

(6.00)
(4.68)
22
(5.07)
1.93
(3.14)

(6.47)
(4.94)
23
(15.87)
6.03
(9.84)

(5.32)
(3.98)
24
(4.12)
1.57
(2.56)

(7.19)
(5.27)
25
(22.81)
8.67
(14.14)

(4.55)
(3.27)
26
(3.34)
1.27
(2.07)

(7.11)
(5.00)
27
(23.65)
8.99
(14.66)

(5.87)
(4.05)
28
(2.66)
1.01
(1.65)

(9.79)
(6.61)
29
(24.06)
9.14
(14.91)

(4.81)
(3.18)
30
(1.96)
0.74
(1.21)

(12.54)
(8.12)
31
(20.02)
7.61
(12.41)

(3.14)
(1.99)
32
(6.07)
2.31
(3.76)

(9.84)
(6.11)
33
(6.29)
2.39
(3.90)

(2.56)
(1.55)
34
(12.29)
4.67
(7.62)

(14.14)
(8.43)
35
(21.39)
8.13
(13.26)

(2.07)
(1.21)
36
(6.55)
2.49
(4.06)

(14.66)
(8.38)
37
(18.11)
6.88
(11.23)

(1.65)
(0.92)
38
(8.61)
3.27
(5.34)

(14.91)
(8.18)
39
(13.47)
5.12
(8.35)

(1.21)
(0.65)
40
(8.86)
3.37
(5.50)

(12.41)
(6.53)
41
(6.65)
2.53
(4.13)

(3.76)
(1.94)
42
(2.04)
0.77
(1.26)

(3.90)
(1.97)
43
(0.00)
0.00
(0.00)

(7.62)
(3.77)
44

(13.26)
(6.43)
45

(4.06)
(1.93)
46

(11.23)
(5.22)
47

(5.34)
(2.43)
48

(8.35)
(3.72)
49

(5.50)
(2.40)
50

(4.13)
(1.76)

(1.26)
(0.53)

(0.00)
(0.00)

0.00
0.00

0.00
0.00

0.00
0.00

0.00
0.00

0.00
0.00

0.00
0.00

0.00
0.00

(173.90)

26

Discount rate
Tax rate
After-tax interest rate
Useful life of equipment
Debt
Purchase of equipment
Principal repayment
Interest expense
Interest tax shields
Depreciation tax shield
Residual value
Total cash flows
Discounted flows @ KD
Principal repayment
Interest expense
Interest tax shields
Depreciation tax shield
Residual value
Total cash flows
Discounted flows @ KD
Principal repayment
Interest expense
Interest tax shields
Depreciation tax shield
Residual value
Total cash flows
Discounted flows @ KD
Principal repayment
Interest expense
Interest tax shields
Depreciation tax shield
Residual value
Total cash flows
Discounted flows @ KD
Principal repayment
Interest expense
Interest tax shields
Depreciation tax shield
Residual value
Total cash flows
Discounted flows @ KD
NPV of Borrow-and-Buy

Cash Flow Analysis of Borrow-and-Buy Alternative (In Million Dollars)

6.75%
38.00%
4.19%
25
0
1
2
3
4
5
6
7
8
267.90
(267.90)
(3.26)
(3.37)
(3.49)
(3.60)
(3.72)
(3.85)
(3.98)
(4.11)
(9.04)
(8.93)
(8.82)
(8.70)
(8.58)
(8.45)
(8.32)
(8.19)
3.44
3.39
3.35
3.31
3.26
3.21
3.16
3.11
7.27
7.27
12.47
12.47
8.90
8.90
6.36
6.36

10

(4.25)
(8.05)
3.06
4.55

(4.40)
(7.91)
3.00
4.55

(1.59)
(1.56)
11
(4.55)
(7.76)
2.95
4.55

(1.64)
(1.57)
12
(4.70)
(7.60)
2.89
4.55

3.51
3.30
13
(4.86)
(7.45)
2.83
2.27

3.47
3.19
14
(5.02)
(7.28)
2.77
2.27

(0.14)
(0.13)
15
(5.19)
(7.11)
2.70

(0.19)
(0.17)
16
(5.37)
(6.94)
2.64

(2.78)
(2.41)
17
(5.55)
(6.76)
2.57

(2.83)
(2.40)
18
(5.73)
(6.57)
2.50

(4.70)
(3.90)
19
(5.93)
(6.38)
2.42

(4.75)
(3.86)
20
(6.13)
(6.18)
2.35

(4.81)
(3.83)
21
(6.33)
(5.97)
2.27

(4.87)
(3.80)
22
(6.55)
(5.75)
2.19

(7.21)
(5.51)
23
(6.77)
(5.53)
2.10

(7.27)
(5.44)
24
(7.00)
(5.31)
2.02

(9.60)
(7.04)
25
(7.23)
(5.07)
1.93

(9.67)
(6.94)
26
(7.48)
(4.83)
1.83

(9.74)
(6.85)
27
(7.73)
(4.57)
1.74

(9.81)
(6.76)
28
(7.99)
(4.31)
1.64

(9.88)
(6.67)
29
(8.26)
(4.04)
1.54

(9.96)
(6.58)
30
(8.54)
(3.76)
1.43

(10.03)
(6.50)
31
(8.83)
(3.48)
1.32

(10.12) (10.20) (10.29) (10.38) (10.47) (10.57) (10.66)

(6.41)
(6.33)
(6.26)
(6.18)
(6.11)
(6.04)
(5.97)
32
33
34
35
36
37
38
(9.13)
(9.43)
(9.75) (10.08) (10.42) (10.77) (11.14)
(3.18)
(2.87)
(2.55)
(2.22)
(1.88)
(1.53)
(1.17)
1.21
1.09
0.97
0.84
0.71
0.58
0.44

(10.98)
(5.78)
41

(11.10)
(5.72)
42

(11.21)
(5.66)
43

(11.33)
(5.61)
44

(11.46)
(5.55)
45

(11.59)
(5.50)
46

(11.72)
(5.45)
47

0.00
0.00

0.00
0.00

0.00
0.00

0.00
0.00

0.00
0.00

0.00
0.00

0.00
0.00

(171.51)

(10.77) (10.87)
(5.91)
(5.84)
39
40
(11.51) (11.90)
(0.79) (0.40)
0.30
0.15

(11.86) (12.00)
(5.40)
(5.35)
48
49

0.00
0.00

0.00
0.00

(12.15)
(5.31)
50

40.19
40.19
14.27

Sums

(9.50)

(59.40)

(61.56)

(55.32)

14.27

27

Value of Early-Buyout Op/on

Amtrak would acquire equipment from
BNYCF in 2017 for $126.6 million

Avg yield on 30-

year bond: 5.5%

Assumed market
equity weight:
100%

Assumed beta: 1

Market risk
premium: 6%

Type: simple European call op/on

Valua/on model: BSM

Op/on value is highly sensi/ve to

WACC

Cost of equity:
11.5% [referred
in case is 11.8%]

28

Underlying as et value $17 Mil ion (Present value of strike price of 126.6 mil ion 18 years from now discounted at WACC 11.8%)
Strike price $126.6 Mil ion Purchase price os asset
Maturity 18.5 years (June 1999 to Dec 2017)
Risk-fre rate
6% 5%to 6%
Volatil ty
25% Footnote 10; volatility estimate of locomotive and train cars
Option Vlaue (BSM)$2.97 Mil ion
29

Adjusted NPV
No Tax

Tax Rate of
38%

Lease

-$217.29
million

-$170.93
million

Borrowand-buy

-$260.26
million

-$171.51
million
30