Ginny’s Restaurant: An Introduction to Capital Investment Valuation Key issues-
Virginia invested in Ginny’s restaurant and she will receive $2 mn as well as $3 mn after one year from today without any other assets, for period of one year with interest rate is 6%. 1. Virginia’s current wealth (Present value of assets) is $4.83 mn. If she spends $2mn today and $3 mn after one year, then after one year from today she will get $5.12 mn.
2. If Virginia has an initial endowment of $4 mn. The future cash flow given as investment today and future cash flow respectively as 1.0, 2.0, 3.0, 4.0 and 1.8, 3.3, 4.4, 5.4. Virginia should invest $3 mn out of $4 mn and after end of one year she will get $5.46 mn.
3. Suppose the Virginia has a strong preference for current versus future consumption and would like to consume at least $3.8 mn immediately. Thus she would have to borrow $2.8 mn.
4. If Virginia does not have $4 mn but still has necessary skill to develop and operate restaurant. By taking loan of $3 mn she should make the investment in the restaurant.
5. If all individuals, savers and spender, prefer current consumption to future consumption, all other things equal, spenders have a relatively higher preference for current consumption. If Virginia shares her ownership interest in the Virginia corporation with widely-diffuse group of investors, savers and spender both would be happy with the option of to invest $3 mn, it would optimize both future value and current value.
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