Railroad Tank Car Assignment This assignment consists of two separate questions. The first assignment requires you to determine the “cost” of a railroad tank car using traditional discounted cash flow analysis where you have to discount forecasted cash flows. You will need to forecast the cash flows. The forecasted cash flows are from the perspective of Union Pacific, the owner and operator of the tank cars. The second assignment is related to the first question but is a separate decision. Assignment two relies entirely on information from question one. The words “assignment” and “question” are used interchangeably in this case.

Assignment 1: Assume that you are a Controller at Union Pacific (UP), one of the largest railroads in the US. UP is acquiring 100 railroad tank cars to transport crude oil. Further assume that you will average $1,250 per day per car in revenue transporting crude when you transport crude. During a fiscal year, the tank cars are idle 25 percent of the time earning zero revenue. During idle times, you will incur $70 a day storage fee and when the cars are in operation, you will incur a $25 cleaning fee per day. Other expenses amount to $750 per day for the entire year, regardless if the cars are in storage or being used. The $750 includes depreciation. The life span of a railroad tank car is 10 years. You will incur retrofit costs of $20,000 after five years. While the retrofit will not prolong the life of the tank car, federal regulations require a retrofit to utilize the car after the initial five-year period. If the retrofit is not completed, you can sell the tank cars for $48,000 to a South American operator (you will use this information in assignment question two below). After the 10-year period (assuming you undertake the retrofit), the cars are sold for scrap, which generates $15,000 per car. Assume an 8 percent discount rate and a 20 percent tax rate. Railroad tank cars are depreciated over their useful 10-year life using straight line depreciation with no salvage value. You estimate depreciation expense based on your previous average acquisition cost, which is $125,000 per tank car. Using discounted cash flow analysis, what is the cost of the 100 railroad tank cars? Cost is defined as the cost that would be used to record the journal entry to acquire 100 brand-new tank cars, based on the discounted cash flow method (Present Value) . Discuss why the result may be different compared to a purchase price of $125,000. Is this a good investment for UP? Why or why not? Note: use 360 days in your calculation if you decide to calculate the numbers using days.

Assignment 2: Is it better to keep the tank cars for 10 years or sell them to the South American operator after five years. Show calculations.

Deliverables: A report addressed to management answering the questions using calculations and supporting documentation. The executive summary should address the questions and the answers or recommendations briefly explaining the rational. The executive summary should not exceed half a page. Please answer the questions in detail in the body of your report. Attach Excel sheets to your email AND copy and paste into the document itself. If you want to show calculations in the body of the paper, feel free to do so. The maximum length of the paper is five pages (about two pages per question), excluding the title page and executive summary. Cite all the works that you use, if any. Please understand that this assignment may require estimations, discounted cash flow analysis, decisions on you part and detailed documentation along with relevant decisions. Feel free to work in teams of two (preferred).

Answer rating: 100% (QA)

1 The cost of the 100 railroad tank cars would be 125000 per tank car This is ... View the full answer