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Giny's Restaurant

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Submitted By sgonzalez75
Words 984
Pages 4
Case Study: Ginny's Restaurant
1a. What is Vrginia's current weath? Cash today Cash in one year Interest Net Present Value 1b. How much can Virginia spend today?

Team 6

$2,000,000 $3,000,000 6% (NPV) = $2M + $3M/ (1+0.06) = $4,830,188.68

Virginia's current wealth is made up of her $2 million in had and the present value of her future $3 million.

Without a loan If Virginia does not want to borrow from the bank, she can spend a maximum of $2 million. With a loan If Virginia makes use of a bank loan, taking into account the $2million in hand and the present value of her future 3 million, she will be able to spend a maximum of $4.83 million. PV of $3 million is $2.83Million PV. Assuming interest rates are constant for all entities, including the bank, within one year's time, 6% will have accrued and Virginia can repay the loan to the bank at $3 million.

1c. How much can Virginia spend one year from now? Future Buying Power Future Value Future Value of 2 million is 2.12 million - $2M (1+0.06) = $2.12 million $2.12 million + $3 million = $5.12 million - Virginia has this amount to spend in one year's time if she spends nothing today.

2a. Assume Virginia had a lump sum of 4 million to invest. How much of the $4 million should Virginia invest in the restaurant? option 1 $1,000,000.00 $3,000,000.00 $1,800,000.00 $3,180,000.00 $4,980,000.00 $1,698,113.00 $698,113.00 option 2 $2,000,000.00 $2,000,000.00 $3,300,000.00 $2,120,001.00 $5,420,001.00 $3,113,208.00 $1,113,208.00 option 3 $3,000,000.00 $1,000,000.00 $4,400,000.00 $1,060,001.00 $5,460,001.00 $4,150,944.00 $1,150,944.00 option 4 $4,000,000.00 $0.00 $5,400,000.00 $0.00 $5,400,000.00 $5,094,340.00 $1,094,340.00

Investment Remaining Cash Future Cash Flow from investment Future Value Cash Total FV PV of FCF from investment Net Value of investment

Virginia should choose Option 3, as this will offer the highest Future

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