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Burlington Northern Railroad Company: Equipment Leasing

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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 demonstrate the most beneficial way to value the auto racks in terms of whether to lease them or own them.

In terms of financing the deal, the company has 3 options. 1) Owning. 2) Leasing. 3) Seasoned Equity Offering.

For the Owning option, BNRR would need to raise 22 million dollars to buy the equipment, which will put immense pressure on company’s books. The loan amount will be spread across 15 years and the estimated age of the equipment is 22 years old.

Some of the disadvantages that I see with this plan are:
• The company is already highly levered with long term debt representing 76% of its total capital structure. We’ve maxed out our debt capacity availability and therefore adding more debt to our books is not recommendable.
• Railroad Industry is a highly capital intensive industry and suffers immensely from illiquid assets. Therefore putting more pressure on our balance sheets would truly affect our bottom line.

In the leasing structure, NEC will lease the equipment to BNRR in a contract that would entail an offer of 2 term lease payments of $ 2.3 million during the first 7 years and $ 2.8 million over the last 8

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