# Ginny's Restaurant Case

Pages: 3 (575 words) Published: October 13, 2011
1. Valuation of Virginia’s assets
a. Present value:

PV = \$2,000,000 + \$3,000,000/(1+0.06)1
= \$2,000,000 + \$2,830,189
= \$4,830,189

b. Future Value (1 year):

FV = 2,000,000(1+0.06)1 + 3,000,000
= 2,120,000 + 3,000,000
= 5,120,000

2. Valuation of Viginia’s assets with investment

c. \$1 million investment
PV = \$1,800,000/(1+0.06)1 + \$3,000,000
= \$1,698,113 + \$3,000,000
= \$4,698,113

d. \$2 million investment
PV = \$3,300,000/(1+0.06)1 + \$2,000,000
= \$3,113,208 + \$2,000,000
= \$5,113,208

e. \$ 3 million investment
PV = \$4,400,000/(1+0.06)1 + \$1,000,000
= \$4,150,943 + \$1,000,000
= \$5,150,943

f. \$4 million investment
PV = \$5,400,000/(1+0.06)1
= \$5,094,340

Virginia’s optimal investment in the restaurant is \$3 million, which give her a total of \$5,150,943 at the end of year 1. This is approximately a 29% increase in her wealth.

3. PV of investment with \$2.8m borrowed

FV= Restaurant Future Cash flows – [Principle(1+0.06)]
= \$4,400,000 – [\$2,800,000(1.06)]
= \$4,400,000 - \$2,968,000
= \$1,432,000
PV = \$1,432,000/1.06
= \$1,350,943

Assuming that Virginia can borrow the balance of the \$3 million investment at a 6% interest rate, she should make the investment regardless.

4. PV of investment with \$3m borrowed

FV = Restaurant Future Cash flows – [Principle(1+0.06)]
= \$4,400,000 – [\$3,000,000(1.06)]
= \$4,400,000 - \$3,180,000
= \$1,220,000
= \$1,220,000/1.06
PV= \$1,150,943

Yes, she should still make the investment as it will net her \$1,150,000.

5. Assuming both are rational, it is in the best interest of both the savers and the spenders to invest \$3 million in the restaurant. While the savers are likely to reinvest their earnings from the investment, the spenders would take out a loan in the amount of their share of the future value of the investment less the interest rate allowing them...

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