|Financial Management | |Ginny’s Restaurant | |Case study answers |
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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:
= $2.18 million + $3 million = $5.12 million
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 | $3,300,000.00 | $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 $1,150,943.40. This means her wealth is $4,150,943.40 in present value terms and $5,460,000 in future value terms.
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 | $1,800,000.00...
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