Amtrak Acela solution
National Railroad Passenger Corporation (“Amtrak”): Acela Financing
Teaching Note
In the late 1990s, the National Railroad Passenger Corporation (Amtrak) faced a rude awakening as the U.S. Congress stipulated that Amtrak eliminate its reliance on federal subsidies by 2002. In response, Amtrak drew up a plan for self-sufficiency, the centerpiece of which was a new, high-speed passenger service that it hoped would boost revenue enough to make Amtrak self-sufficient by 2002.
To run this new service, Amtrak needed to purchase $750 million worth of new locomotives and train cars in 1999. Three alternatives were available for funding the purchase: debt financing, lease financing, or reliance on federal sources.
The case opens in April 1999, with Amtrak’s Chief Financial Officer (CFO) Arlene Friner instructing her staff to review a leveraged-lease proposal that has just been submitted by BNY Capital Funding LLC (BNYCF). The objectives of the case are to:
Introduce students to financial leases as a financing alternative.
Explore the lease-versus-buy decision and the conditions under which financial lease arrangements make sense.
Exercise skills in the valuation of financial leases.
Suggested Advance Study Questions
What is a financial lease? What advantages or disadvantages does it have over debt?
What are the pros and cons of each of the three financing alternatives given in the case?
Which alternative did you choose? Why? Provide quantitative support for your answer.Hypothetical Teaching Plan
What is the problem in the case?
The opening question takes the discussion directly to the heart of the matter. Amtrak’s CFO needs to choose among three financing options. This opening allows the instructor to transition smoothly to question 2.
Alternatively, the instructor could open the discussion by taking a vote on the three financing alternatives. The instructor could then call on students from each camp to explain their votes. It is advisable, however, that
Teaching Note
In the late 1990s, the National Railroad Passenger Corporation (Amtrak) faced a rude awakening as the U.S. Congress stipulated that Amtrak eliminate its reliance on federal subsidies by 2002. In response, Amtrak drew up a plan for self-sufficiency, the centerpiece of which was a new, high-speed passenger service that it hoped would boost revenue enough to make Amtrak self-sufficient by 2002.
To run this new service, Amtrak needed to purchase $750 million worth of new locomotives and train cars in 1999. Three alternatives were available for funding the purchase: debt financing, lease financing, or reliance on federal sources.
The case opens in April 1999, with Amtrak’s Chief Financial Officer (CFO) Arlene Friner instructing her staff to review a leveraged-lease proposal that has just been submitted by BNY Capital Funding LLC (BNYCF). The objectives of the case are to:
Introduce students to financial leases as a financing alternative.
Explore the lease-versus-buy decision and the conditions under which financial lease arrangements make sense.
Exercise skills in the valuation of financial leases.
Suggested Advance Study Questions
What is a financial lease? What advantages or disadvantages does it have over debt?
What are the pros and cons of each of the three financing alternatives given in the case?
Which alternative did you choose? Why? Provide quantitative support for your answer.Hypothetical Teaching Plan
What is the problem in the case?
The opening question takes the discussion directly to the heart of the matter. Amtrak’s CFO needs to choose among three financing options. This opening allows the instructor to transition smoothly to question 2.
Alternatively, the instructor could open the discussion by taking a vote on the three financing alternatives. The instructor could then call on students from each camp to explain their votes. It is advisable, however, that