Amtrak Ppt Solutions

National Railroad Passenger Corporation (Amtrak): Acela Financing

Session 15

1

IIMI/PGP/Finance IIMI/PGP/Fina nce II/2008

Discussion Question

Whether Amtrak should finance the equipment purchases using BNCYF’s leveraged-lease proposal or borrow money and purchase the equipment on its own?

2

IIMI/PGP/Finance IIMI/PGP/Fin ance II/2008

1

National Railroad Passenger Corporatio Corpo ration n (Amt (Amtrak) rak):: Ace Acela la Fina Financing ncing   

 

Dated: 30 April, 1999 People: Arlene Friner, CFO, Amtrak Review: leveraged-lease proposal from BNY Capital Funding LLC (BNYCF) Adviser: Babcock & Brown Financial Corporation Invited: financial institutions to submit lease-financing proposals for planned purchase of..,  

3

Locomotives High-speed train set


National Railroad Passenger Corporation (Amtrak)   





4

Created in: 1970 Created by: US congress Ensured: modern, efficient intercity passengerrail service Remain as: integral part of the national transportation system Govt. mandated: to take over rail-passeng rail-passenger er operations of private railroads IIMI/PGP/Finance IIMI/PGP/Fin ance II/2008

2

National Railroad Passenger Corporatio Corpo ration n (Amt (Amtrak) rak):: Ace Acela la Fina Financing ncing   

 

Dated: 30 April, 1999 People: Arlene Friner, CFO, Amtrak Review: leveraged-lease proposal from BNY Capital Funding LLC (BNYCF) Adviser: Babcock & Brown Financial Corporation Invited: financial institutions to submit lease-financing proposals for planned purchase of..,  

3

Locomotives High-speed train set


National Railroad Passenger Corporation (Amtrak)   





4

Created in: 1970 Created by: US congress Ensured: modern, efficient intercity passengerrail service Remain as: integral part of the national transportation system Govt. mandated: to take over rail-passeng rail-passenger er operations of private railroads IIMI/PGP/Finance IIMI/PGP/Fin ance II/2008

2

National Railroad Passenger Corporation (Amtrak)  

Primary provider of passenger-rail service in US Provided service to..,   

 

Intercity passengers: > 20 million Operated stations: 516 Operated states: 44

Received: subsidies from federal govt. Three strategic business units..,   

5

Amtrak Northeast Corridor Amtrak Intercity Amtrak West


National Railroad Passenger Corporation (Amtrak) 

After Amtrak Reform and Accountability Act 1997 (ARAA)..,  

 

Proposed to eliminated its reliance on federal subsidies by 2002 After 2002; no federal funds could be used for ope rating expenses

Never been profitable in 30-year history To meet the goal of self sufficiency by 2002  

Developed radical business plan Center price: high-speed rail service – Projected annual revenues: $180 million by FY2002

6


3

Income Statement (Values in Millions of USD) Fiscal Year Endin Se t. 0 1994 1995 1996 1997 1998

7

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 234 108

1341 242 91

1413

1497

1555

1674

1392 260 91 542 2285

1330 358 153 45 91 185 245 83 -244 2246 -833

1241 321 172 73 90 144 230 34

1236 321 181 59 109 149 238 25

1299 365 187 46 98 160 242 39

1448 356 190 52 102 181 294 15

2305 -808

2318 -763

2436 -762

-833

-808

-763

-762

2638 -353 577 -930

352 150

392 150

285 120

502 -331

542 -266

36 441 -322

223 142 42 37 444 -318

202 142 82 426 -504

IIMI/PGP/Finance II/2008

Income Statement (Values in Millions of USD) Fiscal Year Ending Sept. 30 1994 1995 1996 1997 1998

8

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

83 21 11 5

79 21 12 4

78 22 11 3

63 16 8 2

6

6

7

6

4

13 17 6 -17 159 -59

10 15 2

10 15 2

10 14 2

8 13 1

154 -54

149 -49

146 -46

-59

-54

-49

-46

115 -15 25 -41

25 11

26 10

18 8

36 -23

36 -18

2 28 -21

13 8 3 2 27 -19


9 6 4 19 -22

4

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

9

100 100 100

102 116 139

105 127 140

116 132 118

121 141 118

100

106

110

11 8

162

100 100 100 100 100 100 100 100

93 90 112 162 99 78 94 41

93 90 118 131 120 81 97 30

98 102 122 102 108 86 99 47

109 99 124 116 112 98 120 18

100 100

103 97

103 92

108 91

100

97

92

91

112

100 100

111 100

81 80

63 95

57 95

100 100

108 80

88 97

88 96

85 152


117 42

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 10 IIMI/PGP/Finance II/2008

5

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

11

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 60 100

Acela    

  

12

New brand New high-speed rail service More than high-speed trains Designed to: differentiate Amtrak passenger trains and service in Northeast Corridor from existing service To begin: service in late 1999 To offer: faster trip times and premium service Served routes: Virginia to Maine


6

Exhibit 1

13


Acela  



Brand representing new way of doing business Designed to: bring high speed and high quality to Northeast Corridor passengers Will offer..,   



Latest and boldest step to change its rail service into a more..,   

14

Faster trip times Comfortable amenities Highly personalized service

Customer-focused Commercially driven Premium transportation service IIMI/PGP/Finance II/2008

7

Acela 

Designed to..,  



Timing between: Washington D.C., to Boston  





Operate as fast as 150 miles an ho ur (241.35 kms an hour) Promised to reduce travel time significantly Current timing: 7 hrs 30 minutes High-speed train: 5 hrs 50 minutes

Late 1999: to begin service between NY city and Boston NY – Washington leg would be added within a year

15


Equipment  

Operate the Acela Regional Service as planned Needed to purchase..,   

15 dual-cab High-horsepower electric locomotives 20 high-speed train sets, consists of..,     



16

First-class coach car: 1 Bistro car: 1 Coach cars: 3 End coach car: 1 Power cars: 2

Estimated total cost for all equipment: $750 million


8

Equipment

High-speed locomotives Train sets

17

No. 15 20

Cost Aggregate Cost 7,161,300 107,419,500 32,129,050 642,581,000 Total 750,000,500


Equipment   

Estimated life: 25 years Residual values: ~15% of original equipment cost Depreciation as per..,  



Arranged finance for all equipment save ($267.9 million) for..,  



18

Accounting purpose: straight-line Tax purposes: 7-year MACRS

Locomotives: 6 Train sets: 7

Amount for which considered BNYCF leveraged-lease proposal: $267.9 million IIMI/PGP/Finance II/2008

9

Financing Options 

Three options..,  



Borrow money to fund the purchase Lease the equipment from a financial institution (such as BNCYF) Rely on federal sources for funding

19


Borrow and Buy 

Major bank offered to underwrite a bond issuance for Amtrak..,      

Term: 20-year Coupon: 6.75 percent per annum Semiannual payments: $12.303 million Payment beginning: Dec 1999 Collateral for the loan: locomotives and trains sets Drawback:  

20

Had recently issued debt Public market might already be saturated with Amtrak paper IIMI/PGP/Finance II/2008

10

Leveraged Lease   

Proposed by: BNCYF Wholly owned subsidiary of the Bank of New York Lessor: BNCYF 





Would provide equity funds needed to finance the purchase

Sole lender and debt provider: Export Development Corporation (EDC) of Canada Funds to be provided..,  

EDC: 80% of required funds BNCYF: 20% of required funds; would receive lease payments only after debtor had been paid

21


BNY Capital Funding LLC's Proposed Leveraged-Lease Strcuture

Lessee

Equipment

Equity investors put up $53.6 million (20% of equipment value) in exchange for lease payments after debt service

Lease Payments

Owner Trustee Wilmington Trust

Lender Export Development Corporation (EDC) of Canada

Equity Investor BNY Capital Funding, LLC

22

Lenders advance $214.3 million (80% of equipment value) in exchange for first claim on lease payments on locomotives and trains ets


11

Leveraged Lease 

Equity and debt funds on closing would flow through Wilmington Trust..,    



An independent third party to the transaction Acted as owner-trustee Rental payments would flows through Would distribute the payments to either EDC or BNCYF

Amtrak.., 



At the end of lease term, could buy equipment from BNCYF at higher terminal fair market value Had an early-buyout option, could acquire the equipment from BNCYF in 2017 for $126.6 million

23


BNY Capital Funding LLC's Proposed Lease-Pa ment Schedule (in Dollars) Date Due Amount 1999 June …. 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

24

2020

Dec June Dec June Dec June Dec June Dec June Dec June Dec J une Dec June Dec J une Dec June Dec June Dec June Dec J une Dec June Dec J une Dec June Dec June Dec June Dec June Dec June Dec J une Dec

$200,102 $3,761,228 $7,965,652 $10,022,594 $10,316,948 $8,617,634 $10,360,645 $9,828,570 $10,367,985 $8,607,823 $10,418,573 $9,683,063 $10,435,186 $8,580,151 $11,599,993 $7,338,339 $11,468,211 $9,475,208 $15,792,709 $7,765,741 $20,224,322 $5,067,035 $15,872,556 $4,121,823 $22,807,129 $3,336,587 $23,645,133 $2,662,913 $24,055,367 $1,957,919 $20,017,608 $6,067,613 $6,287,652 $12,292,315 $21,394,788 $6,551,924 $18,107,167 $8,612,133 $13,469,295 $8,864,543 $6,654,238 $2,035,748 $1


12

Types of Financial Leases 

Direct leases 

 

Lessor purchased equipment or asset and rented it out to lessee

Sale-and-leaseback Leveraged leases 

25

Lessor borrowed money to fund part of purchase of assets, pledging the lease contract as security for the loan


Leveraged Lease 

Treasury staff estimates.., 

 

26

SD of market-value fluctuations of train sets and locomotives: 25% 17-year risk-free rate: 5.78% Amtrak WACC: 11.8%


13

Rely on Federal Sources 



Could use federal monies to fund equipment purchases Congress.., 





Mandated not to use federal subsidies for operating expenses Agreed to fund for capital appropriations

Federal grants considered as premium and precious commodity

27


Rely on Federal Sources 

Preferred to use grant money to fund capital projects that could not be easily and costeffectively financed such as..,    



28

Safety Right-of-way Infrastructure-related projects Major overhauls

Train sets and other rolling stock, could be very efficiently financed through capital markets IIMI/PGP/Finance II/2008

14

Seven-Year MACRS Depreciation Schedule (in % of Depreciable Investment) Year % Depreciated 1 14.29 2 24.49 3 17.49 4 12.49 5 8.93 6 8.93 7 8.93 8 4.45 Because of the half-year convention, seven year MACRS involved eight years of depreciation expenses

29


Types of Lease Finance Lease

Operating Lease

Total lease rental > asset price Lease period = life of asset

No fixed future commitment

Irrevocable by both parties

Cancelable by lessee on notice

Purpose: financing an asset

Purpose: using an asset

Also called ‘capital lease’ Lessee bears: maintenance, insurance, taxes

30

Lessor bears: maintenance, insurance, taxes


15

Types of Lease Finance Lease

Operating Lease

Min lease rental = rate ~ equal Risk on asset falls on lessee to lessee marginal cost of debt Payout will include; asset cost, cost of financing, lessor overhead, rate of return Similar to mortgage loans

31


Finance Lease    

32

Leveraged lease Sale and lease back arrangements Cross border (international) lease Foreign to foreign lease


16

Leveraged Lease 

Parties involved..,   



Lessor – contributes equity (20% to 40%) Lesse Financier – finance by way of term loans

Used for assets requiring huge capital outlay ,         

33

Airplane Satellites Ships Rails Off-shore drinking Nuclear machines Power generation plants Large chemical plants Gas pipe lines IIMI/PGP/Finance II/2008

Leveraged Lease 



Loan is secured by first lien in the equipment by an assignment of leased equipment and leased rental payments Basic documents used..,    

34

Participation agreement – signed by all parties Trust agreement Indenture trust Lease agreement – for tax shield associated with asset ownership and residual value of asset


17

Direct Lease  

Hybrid of operating and financial lease Payout will not include..,   



Features..,    

35

Repairs Maintenance Taxes Duration: 3 or more years Lessor holds the title At expiration: lessee may renew or purchase Full payout


Other Types of Leases            

36

Master lease: blanket leasing Percentage lease: flat rental + additional 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 possibilities 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 regulations of a country Wash lease – tax benefit 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


18

Why Leasing? 

Benefits to lessee..,          

37

Leasing 100% financing Offers cash flow benefits Off balance sheet financing Avoidance of loan covenants Tax planning Creation of working capital Hedge against risk of inflation and obsolescence Fast and flexible financing To over come monopoly act Used in non-priority sector and service sector


Why Leasing? 

Benefits to lessor..,       

38

Additional financial product Reduces risk Increases profitability Accelerates sales Higher leverage [Max. of 10:1] No gestation period Low cost of operations


19

Discussion Question

What is the problem in the case?

39


Problems in the Case 

To choose among three financing options   

Debt Lease financing US govt. funding 



Amtrak ..,  



40

Use of federal monies is neither preferred nor practical

Never been profitable Should become self sufficient by 2002 (3 years away)

Acela the key to self sufficiency [investment decision has been already made] IIMI/PGP/Finance II/2008

20

Discussion Question

What is financial lease? How does it work?

41


Test for Capitalizing Lease 







42

Ownership test: ownership transferred to lessee at the end of lease Alternative ownership test: lessee has right to buy asset at a price substantially below fair market price Economic life test: lease term >= 75% of estimated economic life of the asset Value test: PV of minimum lease payment >= 90% of fair market value of asset at the time of lease


21

Discussion Question

Which alternative to choose? What are the key bets in the decision?

43


Lease vs. Buying 

Lease financing    

Increases company’s debt capacity Public market is saturated with Amtrak debt Also includes interest component Investors will not recognize a financial lease liability as a form of debt?  



Possibility of increasing book income buy avoiding depreciation and interest? 

 

44

Liabilities: PV of financial lease payments Assets: PV of financial lease payments

Lease payments includes depreciation and interest

Possibility of evading capital-expenditures To avoid capital-approval procedures IIMI/PGP/Finance II/2008

22

Discussion Question

Is there really a difference between formally owning an asset, on the one hand, and being entitled full use of the asset even without formal ownership, on the other?

45


Lease vs. Buying  

46

In world of no taxes; leasing = borrow-and-buy Lease amount higher or lower indifference point would result in value destruction for both parties


23

Difference between Lessor and Lessee Creating More Value for Lease   





47

Tax rate differences between lessor and lessee Realizing depreciation deduction by lessor and lessee Asset acquisition and maintenance cost – specialization or scale of economies Realizing salvage values – superiority of property knowledge Leverage abilities between lessor and lessee – difference in interest deductibility


Discussion Question

What, in your view, are the advantages of leasing over debt and vice versa? Instances in which leasing makes sense?

48


24

NPV Analysis of Lease 

Cash flows  





Outflow: lease payments No tax shields on lease payments – Amtrak has no tax benefits Not entitled for residual value of $40.2 million

Discount rate  

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

49


Cash Flow Analysis of Lease Alternative (in Million Dollars) Discount rate Tax rate After-tax interest rate

6.75% 0.00% 6.75% 0

1

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)

(3.76)

(7.97)

(10.02)

(3.52)

( 7. 21 )

( 8. 78)

(10.32)

(8.62)

(8.74)

(7.06)

12 (9.68) 0.00 (9.68)

13 (10.44) 0.00 (10.44)

14 (8.58) 0.00 (8. 58)

15 (11.60) 0.00 ( 11.60)

(10.42)

( 9.68)

(7. 23)

(6.50)

( 10.44)

(8.58)

( 6. 78 )

( 5. 39)

21 (20.22) 0.00 (20.22)

22 (5.07) 0.00 (5.07)

23 (15.87) 0.00 (15.87)

(20.22) (10. 07)

( 5.07) (2.44)

Time Period Lease payments Tax shield on lease payments After-tax lease payments Residual value Total cash flows

31 (20.02) 0.00 (20.02)

32 (6.07) 0.00 (6.07)

(20.02)

Discounted flows @ KD Time Period Lease payments Tax shield on lease payments After-tax lease payments Residual value Total cash flows

(7. 15) 41 (6.65) 0.00 (6.65) (6.65)

(2.04)

(0.00)

Discounted flows @ KD

(1.71)

(0.50)

(0.00)

Lease payments Tax shield on lease payments After-tax lease payments Residual value Total cash flows

(0.20) 0.00 (0.20) (0.20)


(0. 19) 11 (10.42) 0.00 (10.42)

Lease payments Tax shield on lease payments After-tax lease payments Residual value Total cash flows Discounted flows @ KD Lease payments Tax shield on lease payments After-tax lease payments Residual value Total cash flows Discounted flows @ KD

NPV of Lease Alternative

50

2 (3.76) 0.00 ( 3.76)

8 (9.83) 0.00 (9. 83)

9 (10.37) 0.00 (10.37)

10 (8.61) 0.00 ( 8.61)

(10.36)

(9.83)

(10.37)

(8.61)

( 8. 21 )

( 7. 54 )

(7. 69)

(6.18)

16 (7.34) 0.00 (7.34)

17 (11.47) 0.00 (11.47)

18 (9.48) 0.00 ( 9. 48)

19 (15.79) 0.00 (15.79)

20 (7.77) 0.00 (7.77)

(11.60)

( 7.34)

(11.47)

(9.48)

( 15.79)

( 7.77)

( 7.05)

(4.31)

( 6. 52 )

( 5. 21 )

(8. 41)

(4.00)

24 (4.12) 0.00 (4. 12)

25 (22.81) 0.00 ( 22.81)

26 (3.34) 0.00 (3.34)

27 (23.65) 0.00 (23.65)

28 (2.66) 0.00 ( 2. 66)

29 (24.06) 0.00 (24.06)

30 (1.96) 0.00 (1.96)

( 15.87) ( 7. 40 )

(4.12) ( 1. 86)

(22.81) ( 9.95)

( 3.34) (1.41)

(23.65) ( 9. 65 )

(2.66) ( 1. 05 )

( 24.06) (9. 19)

( 1.96) (0.72)

33 (6.29) 0.00 (6.29)

34 (12.29) 0.00 ( 12.29)

35 (21.39) 0.00 ( 21.39)

36 (6.55) 0.00 (6.55)

37 (18.11) 0.00 (18.11)

38 (8.61) 0.00 ( 8. 61)

39 (13.47) 0.00 (13.47)

40 (8.86) 0.00 (8.86)

( 6.07)

(6.29)

(12.29)

(21.39)

( 6.55)

(18.11)

(8.61)

( 13.47)

( 8.86)

(2.10) 42 (2.04) 0.00 (2.04)

( 2. 10 ) 43 (0.00) 0.00 (0.00)

( 3. 98) 44

( 6.70) 45

(1.98) 46

( 5. 30 ) 47

( 2. 44 ) 48

(3. 69) 49

(2.35) 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

(220.26)


25

NPV Analysis of Borrow-and-Buy 

Cash flows      

51


Discount rate Tax rate After-tax interest rate Useful life of equipment Debt P ur ch as e o f e qu ip me nt Principal repayment Int eres t e xpe nse Interest tax shields Depreciation tax shield Residual value Total c ash flows Discounted flows @ K D Principal repayment Interest expense Interest tax shields Depreciation tax shield Residual value Total c ash flows Discounted flows @ K D Principal repayment Interest expense Interest tax shields Depreciation tax shield Residual value Total c ash flows Discounted flows @ K D Principal repayment Interest expense Interest tax shields Depreciation tax shield Residual value Total c ash flows Discounted flows @ K D Principal repayment Interest expense Interest tax shields Depreciation tax shield Residual value Total cash flows Discounted flows @ K D

52

Inflow: debt proceeds Outflow 1: debt proceeds used to finance the equipment Outflow 2: interest and principal repayments No interest tax shields – Amtrak has no tax benefits Depreciation tax shield: 0 Entitled to residual value of equipment

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 ( 26 7. 90 ) (3.26) (3.37) (3.49) (3.60) (3.72) (3.85) (3.98) (4.11) ( 9.0 4) (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

9

10

(4.25) (8.05 ) 0.00 0.00

(4.40) ( 7.91) 0.00 0.00

(12.30) (12.30) ( 11 .9 0) ( 11 .5 1) 11 12 (4.55) (4.70) (7.76) (7.60) 0.00 0.00 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) (12.30) (12.30) ( 10.42 ) ( 10 .0 8) ( 9. 75) 15 16 17 (5.19) (5.37) (5.55) (7.11) (6.94) (6.76) 0.00 0.00 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) (12.30) (8.54) (8.26) 21 22 (6.33) (6.55) (5.97) (5.75) 0.00 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) (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) (12.30) (6.13) (5.93) 31 32 (8.83) (9.13) (3.48) (3.18) 0.00 0.00

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

(12.30) (12.30) (12.30) (12.30) (12.30) (12.30) (12.30) (5.55) (5.37) (5.19) (5.02) (4.86) (4.70) (4.55) 34 35 36 37 38 39 40 (9.75) (10.08) (10.42) (10.77) (11.14) (11.51) (11.90) (2.55) (2.22) (1.88) (1.53) (1.17) (0.79) (0.40) 0.00 0.00 0.00 0.00 0.00 0.00 0.00

(12.30) (12.30) (4.40) (4.25) 41 42

(12.30) (4.11) 43

(12.30) (3.98) 44

(12.30) (3.85) 45

0.00 0.00

0.00 0.00

0.00 0.00

0.00 0.00

0.00 0.00

(12.30) (12.30) (7.23) (7.00) 26 27 (7.48) (7.73) (4.83) (4.57) 0.00 0.00

(12.30) (12.30) (3.72) (3.60) 46 47

0.00 0.00

0.00 0.00

(12.30) (3.49) 48

(12.30) (3.37) 49

0.00 0.00

0.00 0.00

(12.30) (3.26) 50

40.19 40.19 7.64

Sums

(102.97)

(73.88)

(53.01)

(38.04)

7.64

(260.26)


26

NPV Analysis of Lease vs. Borrowand-Buy 

 



53

NPV of interest and principal repayment cash flows discounted by cost of debt will result in cost of debt Difference in NPV Residual value claim of Amtrak at the end of 25 years Leasing is superior – cheaper by $40 million


Discussion Question

What happens to the decision on NPV when Amtrak start making profit and starts claiming any tax shields?

54


27

NPV Analysis of Lease vs. Borrowand-Buy 

Assumed tax rate: 38%  

 

 

Tax shields on lease payments are no longer zero Interest and depreciation tax shields are also positive

Discount rate: after tax cost of debt NPV advantage on leasing is eliminated when taxes are assumed Better to borrow and buy Leasing makes sense; when lessor can use tax shields more effectively than lessee

55


NPV Analysis of Lease vs. Borrowand-Buy

No Tax Lease

Tax Rate of 38%

-$220.26 million -$173.90 million

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

56


28

Cash Flow Analysis of Lease Alternative (in Million Dollars) Discount rate Tax rate After-tax interest rate

6.75% 38.00% 4.19% 0

1

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)


(0.20) 0.08 (0.12) (0.12)

(2.33)

(4.94)

(6.21)

(6.40)

(5.34)

(6.42)

(6.09)

(6.43)

(5.34)


(0. 12)

(2.24)

( 4. 64 )

( 5. 72)

(5.77)

(4.72)

( 5. 56 )

( 5. 16 )

(5. 34)

(4.34)

11 (10.42) 3.96 (6.46)

12 (9.68) 3.68 ( 6.00)

13 (10.44) 3.97 (6.47)

14 (8.58) 3.26 (5.32)

15 (11.60) 4.41 (7.19)

16 (7.34) 2.79 ( 4.55)

17 (11.47) 4.36 (7.11)

18 (9.48) 3.60 (5.87)

19 (15.79) 6.00 (9.79)

20 (7.77) 2.95 ( 4.81)


(6.46)

(6.00)

(6.47)

(5.32)

(7.19)

(4.55)

(7.11)

(5.87)

(9.79)

(4.81)

(5. 14)

(4.68)

( 4. 94 )

( 3. 98)

( 5.27)

(3.27)

( 5. 00 )

( 4. 05 )

(6. 61)

(3.18)

21 (20.22) 7.69 (12.54)

22 (5.07) 1.93 ( 3.14)

23 (15.87) 6.03 (9.84)

24 (4.12) 1.57 (2. 56)

25 (22.81) 8.67 (14.14)

26 (3.34) 1.27 (2.07)

27 (23.65) 8.99 (14.66)

28 (2.66) 1.01 (1. 65)

29 (24.06) 9.14 (14.91)

30 (1.96) 0.74 ( 1.21)

(12.54) (8. 12)

(3.14) (1.99)

(9.84) ( 6. 11 )

(2.56) ( 1. 55)

(14.14) ( 8.43)

(2.07) (1.21)

(14.66) ( 8. 38 )

(1.65) ( 0. 92 )

(14.91) (8. 18)

(1.21) (0.65)

Time Period Lease payments Tax shield on lease payments After-tax lease payments Residual value Total cash flows

31 (20.02) 7.61 (12.41)

32 (6.07) 2.31 (3.76)

33 (6.29) 2.39 (3.90)

34 (12.29) 4.67 (7.62)

35 (21.39) 8.13 ( 13.26)

36 (6.55) 2.49 (4.06)

37 (18.11) 6.88 (11.23)

38 (8.61) 3.27 ( 5.34)

39 (13.47) 5.12 (8.35)

40 (8.86) 3.37 (5.50)

(12.41)

(3.76)

(3.90)

(7.62)

(13.26)

(4.06)

(11.23)

(5.34)

(8.35)

(5.50)

Discounted flows @ KD Time Period Lease payments Tax shield on lease payments After-tax lease payments Residual value Total cash flows

(6. 53) 41 (6.65) 2.53 (4.13)

(1.94) 42 (2.04) 0.77 (1.26)

( 1. 97 ) 43 (0.00) 0.00 (0.00)

( 3. 77) 44

( 6.43) 45

(1.93) 46

( 5. 22 ) 47

( 2. 43 ) 48

(3. 72) 49

(2.40) 50

(4.13)

(1.26)

(0.00)

0.00

0.00

0 .00

0.00

0 .00

0.00

0 .00


(1.76)

(0.53)

(0.00)

0.00

0.00

0.00

0.00

0.00

0.00

0.00

Discounted flows @ KD Lease payments Tax shield on lease payments After-tax lease payments Residual value Total cash flows Discounted flows @ KD

NPV of Lease Alternative

57


Discount rate Tax rate Af t er -t ax i nt er es t r at e U se fu l l if e o f e qu ip me nt Debt Purchase of equipment P rinc ipal r ep ay me nt Interest expense Interest tax shields Depreciation tax shield Residual value Total cas h fl ows Discounted flows @ K D P rin ci pal r ep ay me nt Interest expense Interest tax shields Depreciation tax shield Residual value Total cas h fl ows Discounted flows @ K D P rin ci pal r ep ay me nt Interest expense Interest tax shields Depreciation tax shield Residual value T ot al c as h f lo ws Discounted flows @ K D P ri nc ip al r ep ay me nt Interest expense Interest tax shields Depreciation tax shield Residual value T ot al c as h f lo ws Discounted flows @ K D Principal repayment Interest expense Interest tax shields Depreciation tax shield Residual value Total cash flows Discounted flows @ K D

58

(173.90)

NPV of Borrow-and-Buy

Cash Flow Analysis of Borrow-and-Buy Alternative (In Million Dollars) 6.75% 38.00% 4 .1 9% 25 0 1 2 3 4 5 6 7 8 267.90 (267.90) ( 3. 26 ) (3 .3 7) (3 .4 9) (3 .60 ) (3 .7 2) ( 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

9

10

(4 .2 5) (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 .3 0 13 ( 4. 86) (7.45) 2.83 2.27

3.47 3 .1 9 14 (5 .0 2) (7.28) 2.77 2.27

( 0.14) ( 0. 13 ) 15 ( 5. 19 ) (7.11) 2.70

(0.19) ( 0. 17 ) 16 (5 .3 7) (6.94) 2.64

(2.78) ( 2. 41 ) 17 ( 5. 55 ) (6.76) 2.57

(2.83) ( 2. 40 ) 18 (5 .7 3) (6.57) 2.50

(4.7 0) ( 3. 90 ) 19 ( 5. 93 ) (6.38) 2.42

(4.75) ( 3. 86) 20 (6. 13 ) (6.18) 2.35

(4.81) ( 3 .8 3) 21 ( 6. 33 ) (5. 97) 2.27

( 4.87 ) ( 3. 80 ) 22 ( 6. 55 ) (5 .7 5) 2.19

(7 .2 1) ( 5 .5 1 ) 23 (6. 77 ) ( 5. 53 ) 2.10

( 7.27 ) ( 5. 44 ) 24 ( 7. 00 ) (5 .3 1) 2.02

(9. 60) ( 7. 04 ) 25 (7 .2 3) (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 ( 8.2 6) (4.04) 1.54

( 9.96) ( 6. 58 ) 30 ( 8. 54) ( 3.76) 1.43

( 10 .0 3) ( 10 .1 2) ( 10 .2 0) ( 10 .2 9) ( 10 .3 8) ( 10 .4 7) ( 10 .5 7) ( 10 .6 6) ( 6 .5 0 ) ( 6. 41 ) ( 6. 3 3) ( 6. 26 ) ( 6. 1 8) ( 6 .1 1 ) ( 6. 04 ) ( 5 .9 7) 31 32 33 34 35 36 37 38 ( 8. 83 ) ( 9. 13 ) (9 .4 3) ( 9 . 75 ) ( 10 .0 8) ( 10 .4 2) ( 10 .7 7) ( 11 .1 4) (3. 48) (3. 18) (2.87 ) (2 .5 5) (2. 22) (1.88) ( 1. 53) ( 1. 17) 1.32 1.21 1.09 0.97 0.84 0.71 0.58 0.44

( 10 .9 8) ( 11 .1 0) ( 5. 7 8) ( 5. 7 2) 41 42

0.00 0.00

0 .00 0.00

(1 0. 77 ) ( 10 .8 7) ( 5. 91 ) ( 5. 84 ) 39 40 ( 11 .5 1) ( 11 .9 0) (0.79) (0.40) 0 .30 0.15

( 11 .2 1) ( 11 .3 3) ( 11 .4 6) ( 11 .5 9) ( 11 .7 2) ( 11 .8 6) ( 12 .0 0) ( 12 .1 5) ( 5 .6 6) ( 5 .6 1) ( 5 .5 5 ) ( 5 .5 0 ) ( 5 .4 5) ( 5. 4 0) ( 5 .3 5 ) ( 5. 3 1) 43 44 45 46 47 48 49 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

40.19 40.19 14.27

Sums

(9.50)

(59.40)

(61.56)

(55.32)

14.27

(171.51)


29

Value of Early-Buyout Option 

  

Amtrak would acquire equipment from BNYCF in 2017 for $126.6 million Type: simple European call option Valuation model: BSM WACC     



59

Avg yield on 30-year bond: 5.5% Assumed market equity weight: 100% Assumed beta: 1 Market risk premium: 6% Cost of equity: 11.5% [referred in case is 11.8%]

Option value is highly sensitive to WACC IIMI/PGP/Finance II/2008

Underlying asset value $17 Mil ion (Present value of strike price of 126.6 million 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-free rate 6% 5% to 6% Volatility 25% Footnote 10; volatility estimate of locomotive and train cars Option Vlaue (BSM) $2.97 Million

60


30

Adjusted NPV

No Tax Lease

Tax Rate of 38%

-$217.29 million -$170.93 million

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

61


Discussion Question

What, in your view, are the advantages of leasing over debt and vice versa?

62


31

Amtrak Ppt Solutions

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