Ginny's Restaurant Case

Only available on StudyMode
  • Download(s) : 691
  • Published : February 22, 2011
Open Document
Text Preview
Ginny’s Restaurant Case
An Introduction to Capital Investment Valuation

1. Virginia’s current wealth is $4,830,188.68
CF0=2,000,000
CF1=3,000,000
I/Y=6%

Virginia can spend and consume now $4,830,188.68. If she waits to spend and consume for one year she will have $5,120,000 to spend and consume.

2. Virginia should invest $3,000,000 in Ginny’s Restaurant. In one year the $4,000,000 endowment will be worth $4,240,000 without investing it. If Virginia invests $3,000,000 in Ginny’s Restaurant it will give her a future cash flow of $5,460,000.00. This investment will yield the largest amount of money and the end of one year.

Option 1: Invest $1,000,000.
A $1,000,000 investment will have future cash flows of $1,800,000. The additional $3,000,000 that Virginia will have left after the investment will be worth $3,180,000 at the end of the year. FV=$3,000,000(1.06)

FV=$3,180,000
Total cash flows at the end of year one will be $3,180,000+$1,800,000=$4,980,000.00

Option 2: Invest $2,000,000.
A $2,000,000 investment will have future cash flows of $3,300,000. The additional $2,000,000 that Virginia will have left after the investment will be worth $2,120,000 at the end of the year. FV=$2,000,000(1.06)

FV=$2,120,000
Total cash flows at the end of year one will be $2,120,000+$3,300,000=$5,420,000.00

Option 3: Invest $3,000,000.
A $3,000,000 investment will have future cash flows of $4,400,000. The additional $1,000,000 that Virginia will have left after the investment will be worth $1,060,000 at the end of the year. FV=$1,000,000(1.06)

FV=$1,060,000
Total cash flows at the end of year one will be $1,060,000+$4,400,000=$5,460,000.00

Option 4: Invest $4,000,000.
A $4,000,000 investment will have future cash flows of $5,400,000.

3. If Virginia invests the $3,000,000 in Ginny’s Restaurant then she will be unable to consume $3,800,000 that she would prefer to have immediately. By investing the $3,000,000 in Ginny’s Restaurant she will only...
tracking img