McCombs School of Business

FIN 370 Case Summary

You must attend class to receive credit for this assignment
Name: Case: Amtrak: Acela Financing Section:

Case Background (who, what, when, where?):

The National Railroad Passenger Corporation (Amtrak) was created in 1970 by the U.S. Congress to
ensure that modern, efficient intercity passenger rail service would remain an integral part of the
national transportation system
Amtrak took over operations of private railroads
Historically, Amtrak received annual federal subsidies and had never been profitable in its 30-year
history
In 1997, Congress passed an act mandating that Amtrak eliminate its reliance on federal subsidies by
2002
Introduction of the Acela line, a high-speed train, to begin service in late 1999
In April of 1999, Arlene Friner, CFO of Amtrak, must decide whether Amtrak should finance Acela
using BNY Capital Funding LLC (BNYCF) leveraged-lease proposal or borrow money and purchase the
equipment on its own

Primary Problem and Precipitating Issue(s):

Whether Amtrak should finance the equipment purchases of Acela using BNYFCs leveraged-lease
proposal or borrow money and purchase the equipment on its own

Case Perspective (audience for the case analysis):

Financial advisor to Arlene Friner and Amtrak

Decision Alternatives:
Borrow money to fund the purchase
o Offer of major bank to underwrite a bond issuance for Amtrak
o However, the public market might already be saturated because Amtrak recently issued debt
Lease the equipment from a financial institution such as BNYCF
o 80% debt, 20% equity
o Third party to act as owner-trustee
Rely on federal sources for funding
o Amtrak can still used federal funding for capital appropriations
o Acela equipment considered a capital-asset acquisition

Analyses and methodologies (how will you evaluate the problem?):

Preform a discounted cash flow analysis to determine the most cost-efficient alternatives between the
three options
Calculate the salvage value of the equipment
Calculate the NPV of each alternative

Initial Recommendation and Rationale (based on your reading of the case):

Amtrak should borrow money to fund the purchase
o Advantage of interest and deprecation tax shield, as well as the end salvage value