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

Chinese Chess - Airline Business During COVID-19
New answer on Jul 20, 2020
2 Answers
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Anthony asked on Jul 07, 2020

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.

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Content Creator
replied on Jul 16, 2020
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

Hi, I would recommend you to reach out to the author via the page :)

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Content Creator
replied on Jul 20, 2020
#1 BCG coach | MBB | Tier 2 | Digital, Tech, Platinion | 100% personal success rate (8/8) | 95% candidate success rate

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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