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# Ginny’s Restaurant

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|Financial Management | |Ginny’s Restaurant | |Case study answers | | | | | | | | | | |

Question 1 a. Virginia’s current wealth = Virginia’s cash flow today + Present value of Virginia’s cash flow in 1 year Virginia’s current wealth = \$2million + \$2. 83 million = \$4. 83 million b. Assuming, Virginia has no other source of incoming cash flow; her current liquidity is \$2 million. She can spend and consume \$2 million today. c. Money Virginia can spend and consume one year from now if she consumes nothing today = Future value of \$2 million in one year + Cash flow received in one year’s time Therefore, Money Virginia can spend and consume in one year from now: = .

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8 million + \$3 million = \$5. 12 million Question 2 a. Assuming, whatever money is not invested in Ginny’s restaurant is invested in the bank. |Investment |Investment (Bank) |Future cash flow from |Future value of |Total Future value of the| |(Restaurant) | |investment (after 1 year) |investment in Bank |entire investment | |\$1,000,000. 00 |\$3,000,000. 00 | \$1,800,000. 00 | \$3,180,000. 00 | \$4,980,000. 00 | |\$2,000,000. 00 |\$2,000,000. 00 | \$3,300,000. 0 | \$2,120,000. 00 | \$5,420,000. 00 | |\$3,000,000. 00 |\$1,000,000. 00 | \$4,400,000. 00 | \$1,060,000. 00 | \$5,460,000. 00 | |\$4,000,000. 00 | \$0 | \$5,400,000. 00 | \$0 | \$5,400,000. 00 | b. Virginia’s Ginny’s current wealth is \$4 million. After the investment of \$3 million in the restaurant, Virginia’s wealth increases by ,150,943.

40. This means her wealth is \$4,150,943. 40 in present value terms and \$5,460,000 in future value terms.

Question 3 Assuming, that if Virginia goes ahead with her investment in Ginny’s restaurant and also wishes to consume \$3. 8 million the only source of extra cash is the bank. The bank is willing to loan money at an interest rate of 6% per year. |Money Virginia consume now | \$ 3,800,000. 00 | |Cash flow today | \$ 4,000,000. 00 | |Money remaining after consumption | \$ 200,000. 00 | Investment (Restaurant) |Extra money required after|Payment to the bank in 1 year|Future cash flow from |Net wealth after bank | | |consumption (Bank loan) | |investment (after 1 year) |loan payments (after 1 | | | |(6% interest) | |year) | | \$1,000,000. 00 | \$800,000. 00 | \$848,000. 00 | \$1,800,000. 00 | \$952,000. 00 | | \$2,000,000. 00 | \$1,800,000. 0 |\$1,908,000. 00 | \$3,300,000. 00 | \$1,392,000. 00 | | \$3,000,000. 00 | \$2,800,000. 00 | \$2,968,000. 00 | \$4,400,000. 00 | \$1,432,000. 00 | | \$4,000,000. 00 | \$3,800,000. 00 | \$4,028,000. 00 | \$5,400,000. 00 | \$1,372,000. 00 | Based on the above calculations, if Virginia goes ahead with any of the investment choices she will have a positive net wealth in 1 year time. Hence, she can consume \$3. 8 million now. Question 4

Assuming, the bank loan is compounded annually and payment is made at the end of the year. |Bank loan |Payment to bank in 1 year (6% |Future cash flow from |Net wealth after bank loan | | |interest) |investment |payments) | |\$1,000,000 |\$1,060,000. 00 |\$1,800,000 |\$740,000. 00 | |\$2,000,000 |\$2,120,000. 00 |\$3,300,000 |\$1,180,000. 0 | |\$3,000,000 |\$3,180,000. 00 |\$4,400,000 |\$1,220,000. 00 | |\$4,000,000 |\$4,240,000. 00 |\$5,400,000 |\$1,160,000. 00 | Virginia should make an investment of \$3 million in Ginny’s restaurant. This investment will generated the largest value of net wealth in 1 year time. Question 5 Assumption: An investment on a portion or whole of \$4 million has to be made. Spenders have a higher preference for current consumption. They would want more money in present value terms to be able to spend.

Savers have a higher preference to save for the future. They would want more money in future value terms. Based on the above, the investment of \$3 million in the restaurant has the highest payoff in present value terms and future value terms. There is a higher probability of spenders and savers agreeing to an investment of \$3 million. If there is a investment made for \$3million out of four in Gini’s restraunt, one million will be left for distribution as dividents to the shareholders. The net presnet value of the three million invested is nearly \$1. 4 million.

Therefore in terms of savers this will be a good deal because they would be able to save nealy as much as consumers will consume in todays dollars. This will be a perfect tradeoff between the two parties. An investment of \$3 million in the restaurant leaves \$1 million for distribution as dividends to shareholders. This works for spenders as they get a part of \$1 million to spend/consume today. The Net Present Value (NPV) of the investment of \$3 million in the restaurant is \$1. 4 million. This is the best possible investment option out of the four options provided. This works for Savers as they have more money saved.

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