Burlington Equipment Leasing

EXECUTIVE SUMMARY

1. Case overview

Burlington Northern Railroad Company (BNRR) is considering the bid from the lease finance company. BRNN is planning to expand further by investment in the fixed assets and improving the network. Paul Weyandt, the director of Equipment finance at BNRR is a talented personality and has built up a good relation with a leasing company called Norwest Equipment finance, which is offering the leasing arrangement at the attractive agreement. Following is the detailed analysis on the Lease arrangements and the buy arrangement and the evaluation on both the options.

In this case analysis, Paul is concerned to the options available for the expansion such that whether to accept the lease offer for the equipment, Auto Rocks, or to buy the equipment. The detailed analysis is required on both of the options. The cash flows relevant to the leasing arrangements and of the buy option are required to be shown and explained. The net present value on lease agreement is required to be calculated and the sensitivity on present value to the residual value of that equipment.

1. Key Issue

1. Evaluation of Lease regarded as an Investment or a Financing Decision?
2. After-Tax Cash flow Relevant To Paul Weyandt If Burlington Purchases the Auto Racks?
3. Determining After-tax cash flows directly attributable to the leasing decision and Discount Rate Used For These Cash flow.
4. Net Present Value of Leasing
5. BNNR’s Tax Status according to our Syndicate Analysis
6. Estimated Residual value, how important?

1. Analysis

1. In current situation the company is considering the option of leasing the equipment because it does not have sufficient amount of cash available to purchase the equipment. When Company decided to buy an asset, so investing decision has been made. But when we use lease contract to acquire the asset, it become financing decision. The lease is an agreement with a contract between the lessee who uses the asset and the lessor owning the asset and permits to use the asset with the rental fee for a specified period of time.

1. After tax cash flow if Burlington purchase the autorack

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1. After-tax cash flows directly attributable to the leasing decision and Discount Rate Used For These Cash flow.

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Calculation of cash outflow from leasing option and Net present value of leasing

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1. Has been explained above
2. BNRR’s tax status

Based on our analysis, since BNRR  have heavy demand  for capital equipment in a railroad meant that BNRR carried a gread deal on equipment on its book and as result company incures large accelerate –depreciation expense. This with other tax preference items has been sufficient to make BNRR subject to Alternative Minimum Tax (AMT) and this status make BNRR’s assets should be depreciated under straight line method.