1.a) What is Ginny's current wealth? b) If Ginny spends nothing today, how much can sheconsume next year?a. Virginias current wealth = NPV (6%, 2, 3) = $4.83M. She can consume $4.83M today. b. Assuming she consumes nothing today, she can consume $5.12M next year.
2. What should Ginny do to maximize her wealth?Virginia should invest $3m of her money into the restaurant and put the rest in the bank. At theend of the year, she will have $5.46M. (ie. A return of 36.5%). Her wealth would have grown36.5%.
3. If Ginny had $4m and wanted to spend $3.8m now, what should she do to maximize her wealth?Virginia would have to borrow $2.8M from creditors in order to invest $3M. That would giveher an optimal return after paying interest and principle. She would have $2.492M left at the endof the year.
4. If Ginny had no money now, and could only make bank loans as the only source of funding,what should she do?Virginia should still invest $3M in the restaurant. That is the optimal investment, which pays>6% per incremental $1M investment.
5. Savers and Spenders have different characteristics. What would each group want to do, andwill they reach a compromise?To invest $3M would optimize the future value and also the current value of the company.Hence, both savers and spenders would be happy with that option.
6. Should Ginny invest in the Smoked ham business? Assuming she has cash from theinvestment made above, how should she raise capital if she does not want bank loan and does notwant to spend current money?Virginia should invest into this, since the NPV is positive, and the IRR is 36%. She could try toraise money on the capital markets for the new venture.
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