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…

Although our company enjoys a respectable credit in the market place, one of the other significant advantages of leases is especially for company’s that deals with bad credit or have a need to negotiate a longer payment plan to lower their costs, such lease terms/structure are highly beneficial in that respect as well.
• Leasing the equipment will also allow our business to address the problem of obsolescence which is present to some degree within our industry as well. We would not need to worry about technology getting outdated in a short period of time, as it would passes the burden of obsolescence onto the lessor.
• With Northwest purchasing the Auto Racks, it is bound to gain from the following items: o Accelerated depreciation of assets (7-year MACRS) o Tax shield based on marginal tax rate of 34%.
But I believe it shields our company from the major liability of owning the equipment. Therefore it’s a win-win situation for both the parties involved.

Considering the limited/declining growth in our industry, issuing Equity will not be a commendable choice either and therefore is not recommended.

Considering all of our Financials, along with detailed comparison of both the realistic options- 1 and 2 (attached Exhibit 1), leasing fetches the company a better structure in terms of the NPV associated with this project. The net advantage of leasing vs owning is 824,000 towards leasing and also generates an IRR of 7.96%.

As far as the