Amtrak Case - Case Assignment Write Up PDF

Preview

Summary

Case Assignment Write Up...

Description

McCombs School of Business FIN 370 – Case Summary You must attend class to receive credit for this assignment Name: Daniel Beam

Case: National Railroad Passenger Corporation Section: TTH 9:30-11:00

Case Perspective (audience for the case analysis): The POV for the case is in regards to the team of Arlene Friner CFO of the National Railroad Passenger Corporation, otherwise known as “Amtrak.” Case Background (who, what, when, where?): The case is set during April 30th, 1999. Amtrak is planning to purchase locomotives and high-speed train sets. This new equipment would be utilized on the “Acela” line. The new rail line is scheduled to begin operations in late 1999 and promises to provide faster trip times and premium service. Amtrak started in 1970. The U.S. Congress created the National Railroad Passenger Corporation (Amtrak) to ensure that “modern, efficient intercity passenger rail service would remain an integral part of the national transportation system.” Since Amtrak’s inception they have been the primary provider of passenger-rail service in the United States. The business services more than 20 million intercity passengers and operated 516 stations in 44 states. Previously, Amtrak had received annual subsidies from the federal government. But in 1997, Congress passed the Amtrak Reform and Accountability Act (ARAA). The ARAA called for the elimination of Amtrak’s reliance on federal subsidies by 2002. This was the cause for the need of the new trains for the project which projected revenues of $180 million by fiscal-year 2002. The Acela trains were able to operate as fast as 150 miles per hour. For example, the current trip from Washington D.C., to Boston, currently took 7 hours and 30 minutes, would take 5 hours and 50 minutes on the new high-speed trains. The entire service was expected to be in place by fall of 2000. For the operation of Acela, Amtrak needed to purchase 15 dual-cab, high-horsepower electric locomotives and 20 high-speed train sets. The estimated total cost for all of the new equipment was around $750 million. These trains would have useful lives of 25 years and 15% residual values. Primary Problem and Precipitating Issue(s): The primary problem is under a tight window how should Amtrak go about funding this new operation. The fact that they now had to go off of the government subsidies by 2002 threw a wrench in operations as Amtrak had never been profitable in their 30-year history. Decision Alternatives: 1. Borrow money to fund the purchase 2. Lease the equipment from a financial institution such as BNYCF ($267.9 million) 3. Rely on federal sources for funding Analyses and methodologies (how will you evaluate the problem?): We will want to complete a financial statement analysis and future cash flow projections. Using a DCF analysis we will be able to compare the three scenarios, along with sensitivity analysis on different variables to determine the variability in the funding options and the project itself. We will also want to complete a ratio analysis to see the long term feasibility of the three options. Initial Recommendation and Rationale (based on your reading of the case): Looking through the case Amtrak has relied on the federal sources of funding for a long time and it may be an aggressive adjustment to step away from that, when it is technically an option to use federal funding still for capital appropriations. However, they are against this option. I would recommend the organization to take the lease option. They just recently issued debt and the lease option provides for significantly lower semi-annual

McCombs School of Business FIN 370 – Case Summary payments in nearly all payback periods as compared to debt. This is important as they are making this new transition and adjusting to the new operations....