This is a Darden case study. The chief of equipment finance at Burlington Northern Railroad Company is required to determine if a leveraged-lease offer should be accepted or not. The case focuses on the significance of the lessee's tax standing to the worth of the lease and in what way the assessment of residual value impacts the process of valuing for the lessee as well as the lessor. To assess the lease adequately and with care, the student must first highlight the important cash flows and the fitting discount rates for those cash streams.
Depreciation ($), Tax Benefit from Depreciation ($), Interest Expense ($), Tax Benefit from Interest ($), Principal Payment ($), Total Outflow of Cash ($)
PV OF NET OUTFLOWS
Lease Payments ($), Tax Benefit from Lease Payments ($), After Tax Lease ($), Purchase at Residual Value ($), Total Cash Outflow ($)
PV of Net Cash Out flows
Should the lease be regarded as an investment or financing decision?
What are the after-tax cash flows relevant to Paul Weyandt if Burlington purchases the auto racks?
What are the after-tax cash flows directly attributable to the leasing decision, and what discount rate should be used for those cash flows?
What is the net present value of leasing?
How important is BNRR’s tax status to your analysis?
How important is your estimate of the residual value to your analysis?