Amtrak Case
Christopher Johansen
Yelena
Nicole
FIN 465
Amtrak Case
Introduction
Amtrak was formed in 1970 by the U.S. Congress in order to ensure that rail service would remain an “integral part of the national transportation system.” Amtrak has become the main provider of all passenger rail services in the U.S. and as of 2002 Amtrak has become completely self sufficient and is no longer allowed to use federal subsidies to cover their operating expenses. In order to become self sufficient Amtrak has developed a high-speed rail service, called Acela, which is projected to bring in revenues over $100 million a year.
The Issue
Due to the Amtrak Reform and Accountability Act passed by Congress in 1997 the corporation is now forced to “eliminate its reliance on federal subsidies by 2002.” This poses a very serious and detrimental problem for Amtrak as they have never been profitable in the past 30 years since the company’s inception. This has caused the firm to be very creative and develop some innovative and profitable solutions. The leading solution to their economic problems is a radical new business plan which focuses on the creation and development of a high-speed rail service. In …show more content…
order to launch this new service Amtrak needs to purchase the necessary equipment at a total cost around $750 million. The firm has been able to secure almost half of this amount from investors, but the issue remains of how to finance the remaining $267.9 million that is needed.
Options
Amtrak really has two main options to fund their new Acela line.
The first is to borrow money from investors to fund the purchase and the second is to lease the needed equipment from a financial institution like BNYCF. They currently have an offer from a bank to borrow the money and acquire more debt or to take out a leveraged financial lease with BNYCF. In a financial lease Amtrak would obtain the needed funds from BNYCF and make semi-annual payments until the lease was paid off and at the end of the lease term Amtrak would have the opportunity to buy the equipment at the higher of terminal or fair market value. One advantage of a lease over acquiring more debt is that it wouldn’t further saturate the public market with additional bonds as the company has recently issued
debt.
Recommendation
There are pros and cons for each of the options. An advantage of taking on debt is that it is the easiest method; however, a disadvantage is that the liability would be recorded in full on their balance sheet. An advantage of a financial lease is that unlike debt it would not be recorded in full as a liability on their balance sheet as leases are recorded as they are incurred and not in one big lump sum. The third option is to use Federal grant funding, which is considered to be a premium and precious commodity to Amtrak and used only as a last resort.
In order to better assess the given options various financial analyses have been completed. Attached is an income statement forecast for Amtrak for the years from 1999 to 2003. The forecast shows that the firm will continue to lose money at (451), (744), (1,158), (1,680), and (1,825) respectively. In addition attached is a discounted cash flow valuation of the firm. The valuation was negative for terminal value, the present value of the terminal value, and the overall value of the firm. Given this data and calculations it is recommended that Amtrak should rely on federal sources to fund the Acela project. Although Federal funds are to be used as a last resort there is a possibility that the funds that are available now may not be again in the future and therefore Amtrak should take advantage of the situation and use the available funding now. This suggestion is also supported by the financial data that shows both acquiring more debt or obtaining a financial lease are both risky options that may put Amtrak further in the red and prevent them from ever becoming financially stable and self sufficient.
Amtr
Yelena
Nicole
FIN 465
Amtrak Case
Introduction
Amtrak was formed in 1970 by the U.S. Congress in order to ensure that rail service would remain an “integral part of the national transportation system.” Amtrak has become the main provider of all passenger rail services in the U.S. and as of 2002 Amtrak has become completely self sufficient and is no longer allowed to use federal subsidies to cover their operating expenses. In order to become self sufficient Amtrak has developed a high-speed rail service, called Acela, which is projected to bring in revenues over $100 million a year.
The Issue
Due to the Amtrak Reform and Accountability Act passed by Congress in 1997 the corporation is now forced to “eliminate its reliance on federal subsidies by 2002.” This poses a very serious and detrimental problem for Amtrak as they have never been profitable in the past 30 years since the company’s inception. This has caused the firm to be very creative and develop some innovative and profitable solutions. The leading solution to their economic problems is a radical new business plan which focuses on the creation and development of a high-speed rail service. In …show more content…
order to launch this new service Amtrak needs to purchase the necessary equipment at a total cost around $750 million. The firm has been able to secure almost half of this amount from investors, but the issue remains of how to finance the remaining $267.9 million that is needed.
Options
Amtrak really has two main options to fund their new Acela line.
The first is to borrow money from investors to fund the purchase and the second is to lease the needed equipment from a financial institution like BNYCF. They currently have an offer from a bank to borrow the money and acquire more debt or to take out a leveraged financial lease with BNYCF. In a financial lease Amtrak would obtain the needed funds from BNYCF and make semi-annual payments until the lease was paid off and at the end of the lease term Amtrak would have the opportunity to buy the equipment at the higher of terminal or fair market value. One advantage of a lease over acquiring more debt is that it wouldn’t further saturate the public market with additional bonds as the company has recently issued
debt.
Recommendation
There are pros and cons for each of the options. An advantage of taking on debt is that it is the easiest method; however, a disadvantage is that the liability would be recorded in full on their balance sheet. An advantage of a financial lease is that unlike debt it would not be recorded in full as a liability on their balance sheet as leases are recorded as they are incurred and not in one big lump sum. The third option is to use Federal grant funding, which is considered to be a premium and precious commodity to Amtrak and used only as a last resort.
In order to better assess the given options various financial analyses have been completed. Attached is an income statement forecast for Amtrak for the years from 1999 to 2003. The forecast shows that the firm will continue to lose money at (451), (744), (1,158), (1,680), and (1,825) respectively. In addition attached is a discounted cash flow valuation of the firm. The valuation was negative for terminal value, the present value of the terminal value, and the overall value of the firm. Given this data and calculations it is recommended that Amtrak should rely on federal sources to fund the Acela project. Although Federal funds are to be used as a last resort there is a possibility that the funds that are available now may not be again in the future and therefore Amtrak should take advantage of the situation and use the available funding now. This suggestion is also supported by the financial data that shows both acquiring more debt or obtaining a financial lease are both risky options that may put Amtrak further in the red and prevent them from ever becoming financially stable and self sufficient.
Amtr