Burlington Northern Railroad Company: Equipment Leasing Essay

1139 Words Aug 30th, 2013 5 Pages
Burlington Northern Railroad Company: Equipment Leasing

To: Rob McKenney Vice President & Treasurer BNRR

From: Paul Weyandt Director of Equipment Finance BNRR

Date: July 15, 1990

Subject: Lease Vs Buy Option for Auto Racks Equipment

This memo is in regard to the recent proposal of leasing or buying the bi-level and tri-level Auto Rack equipment for Burlington Northern Railroad Company. As indicated before, this equipment is a great investment for our company as it exceeds our company’s 20% hurdle rate and therefore investing in them would be a great decision for the company. Hence this memo will seek to explain the optimal way to finance this investment; in other words, this memo will try and
…show more content…
Therefore in this agreement the equipment is going to be partially financed by the lessor (Northwest) through a third-party financial institution (Lender) and act as a leveraged lease, wherein the lending company holds the title to the leased asset, while the lessor creates the agreement with the lessee (BNRR) and collects the payment for the use of the equipment. Therefore the lease in this case will be regarded as a financial decision for BNRR

Looking at our company’s financial structure there are many advantages to such a setup:
• Since, such an agreement will be regarded as an Operating Lease and not a Capital Lease; this lease will not be reported on the company’s balance sheet. Keeping the lease off the balance sheet would make our financial ratios appear more attractive (lower debt/asset ratio) than otherwise. Hence, such a setup provides the advantage of financing the deal as an off-Balance Sheet item.
• Leasing business equipment and tools preserves capital and provides flexibility. Less Capital Investment will be required as part of this setup, as compared to owning the equipment.
• Also, the company would be able to take advantage of the tax benefits by paying lower tax’s in the long run, and operate within the covenants of the Alternative Minimum Tax (AMT) with such a setup. Lease payments will be deducted as business expenses on our tax return, reducing the net cost of our
Open Document