Cost Reduction Calculations - is there any reason why the calculations assumed 10 year total for Perpetuity?

Question

Also, despite having access to easy and low-interest loans from the governmenet, would it be sensible to purchase planes without knowing how demand may change after the Covid crisis? Obviously it does not state the amount or % of planes they would plan to purchase.

Answer 1

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Answer 2

Hi Anthony,

Great questions.

In terms of perpituity, the case does not actually assume 10 years. What it does do is assume a 10% discount rate (this is the most standard discount rate across cases). So, Expected Returns / Discount rate of 10% = 10x returns

Regarding plane purchasing, you're absolutely right. This is most certainly a risky decision. This would be important to include in your risks. That being said, the S&P500 is up so heavily against the Russell 5000 precisely because the market sees big, heavily capitalized companies winning. I.e., smaller companies fail, leaving room for the big fish. A smart company/person finds opportunity in crisis! Those with cash+capital to buy cheap assets from distressed companies/individuals now may prove to benefit dramatically in the future.

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