# Ginny's Restaurant

Topics: Net present value, Bond, Rate of return Pages: 5 (873 words) Published: July 20, 2010
|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:

= \$2.18 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 | \$3,300,000.00 | \$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.

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 | \$1,800,000.00...