Ginnys Restaurant free essay sample

|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. 8 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 |entir e 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. 0 | $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 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. 0 |$1,908,000. 00 | $3,300,000. 00 | $1,392,000. 00 | | $3,000,000. 00 | $2,800,000. 00 | $2,968,000. 00 | $4,400,000. 00 | $1,432,000. 00 | | $4,000,000. 00 | $3,800,000. 00 | $4,028,000. 00 | $5,400,000. 00 | $1,372,000. 00 | Based on the above calculations, if Virginia goes ahead with any of the investment choices she will have a positive net wealth in 1 year time. Hence, she can consume $3. 8 million now. Question 4 Assuming, the bank loan is compounded annually and payment is made at the end of the year. |Bank loan |Payment to bank in 1 year (6% |Future cash flow from |Net wealth after bank loan | | |interest) |investment |payments) | |$1,000,000 |$1,060,000. 00 |$1,800,000 |$740,000. 00 | |$2,000,000 |$2,120,000. 00 |$3,300,000 |$1,180,000. 0 | |$3,000,000 |$3,180,000. 00 |$4,400,000 |$1,220,000. 00 | |$4,000,000 |$4,240,000. 00 |$5,400,000 |$1,160,000. 00 | Virginia should make an investment of $3 million in Ginny’s restaurant. This investment will generated the largest value of net wealth in 1 yea r time. Question 5 Assumption: An investment on a portion or whole of $4 million has to be made. Spenders have a higher preference for current consumption. They would want more money in present value terms to be able to spend. Savers have a higher preference to save for the future. They would want more money in future value terms. Based on the above, the investment of $3 million in the restaurant has the highest payoff in present value terms and future value terms. There is a higher probability of spenders and savers agreeing to an investment of $3 million. If there is a investment made for $3million out of four in Ginis restraunt, one million will be left for distribution as dividents to the shareholders. The net presnet value of the three million invested is nearly $1. 4 million. Therefore in terms of savers this will be a good deal because they would be able to save nealy as much as consumers will consume in todays dollars. This will be a perfect tradeoff between the two parties. An investment of $3 million in the restaurant leaves $1 million for distribution as dividends to shareholders. This works for spenders as they get a part of $1 million to spend/consume today. The Net Present Value (NPV) of the investment of $3 million in the restaurant is $1. 4 million. This is the best possible investment option out of the four options provided. This works for Savers as they have more money saved.