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Hard Investment Decision Profitability

Apache Helicopter

#Industrial Goods #Defense
ProHub Comment

This case requires rigorous quantitative analysis combined with qualitative risk assessment. The candidate must structure demand analysis by location, perform detailed cost-benefit calculations across three options, and ultimately make a recommendation based on a narrow profit differential (3% difference between US and Brazil). The case rewards candidates who can articulate assumptions, calculate total profitability accurately, and synthesize financial and strategic risks.

Estimated Time 15 minutes
Difficulty Hard
Source Chicago Booth
50 / 100

Our client is a US defense contractor. One of its divisions manufactures Apache helicopters for military operations. The company is considering setting up a new plant to meet increasing demand in the attack helicopter space. The client is considering three sites for the new plant – Brazil, France, and the US. They have hired us to help them answer the following two questions:

  1. How would you determine the parameters for the decision?
  2. Where should they set up the plant?

Clarifying Information

  1. The client has 3 plants in the US; 2 in Kansas and 1 in Michigan.
  2. The plants operate at full capacity today.
  3. One of the US plants can accommodate an additional assembly line at the cost of $500M; the other 2 are constrained in residential areas and cannot be expanded.
  4. This is the only defense contractor that sells Apache helicopters.
  5. They will only be selling to Brazil, France, or the US.
  6. This is the first time that they sell to Brazil or France.
  7. Defense budget for the next five years: $100B (US), $15B (BR), $10B (FR)
  8. Countries will dedicate a certain percentage of their defense budget to be spent on Apache helicopters based on the location of the plant.
  9. Initial plant set-up costs: US: $500M, Brazil: $2B, France: $3B
  10. Fixed costs per year: US: $100M, Brazil: $100M, France: $100M
  11. Variable cost of production: US: $15M, Brazil: $20M, France: $25M
  12. If helicopters are shipped into the US, then the US Govt. requires them to be certified; the certification process is $15M per chopper.
  13. The helicopters sell for $100M a piece.