Acela Financing

I. Borrow and buy

Pros: There is a tax advantage of borrowing and buy, as the interest payment of the loan is tax deductible. Besides, as the firm uses the loan to purchase the asset, the tax shield of depreciation expenses is also an important part. At the end of the project, they may have a chance to sell this asset at its salvage value.

Cons: Too much debt on the firm’s balance sheet will lead to a high interest payment, which will decrease the TIE ratio, and in turn decrease the bond rating. One possible outcome is that investors will require a higher rate of return as the firm’s risk is increasing. The other might be that people will feel reluctant to invest their money in such company with a high risk.

II. Lease

Pros: It is possible that the lessee is not able to manage such asset efficiently. In this situation, the lessor may be able to buy and manage the asset at less expense than the lessee. A small business or a small division of a larger company cannot achieve these economies and often find it cheaper to lease these assets than to buy them.

Cons: As the company will not purchase the asset, it loses the valuable depreciation tax shield and the salvage value at the end of the lease term will be realized by the lessor. But as the lease payment is also tax deductible, it also could generate some tax benefit.

III. Rely on federal sources

Federal funds