# Ginny's Restaurant Case

Pages: 3 (635 words) Published: February 22, 2011
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...