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?
Without a loan
With a loan

1c. How much can Virginia spend one year from now?
Future Value
Future Buying Power

2a. Assume Virginia had a lump sum of 4 million to invest. How much of the $4 million should Virgin

Investment
Remaining Cash
Future Cash Flow from investment
Future Value Cash
Total FV

option 1
$1,000,000.00
$3,000,000.00
$1,800,000.00
$3,180,000.00
$4,980,000.00

PV of FCF from investment

$1,698,113.00

Net Value of investment

$698,113.00

2a. What happens to Virginia's wealth when she makes the investment in the retaurant?
Virginia spends $3 million on the investment itself, and is left with $1 million cash in hand. She knows

3
Spend
Balance

$3,800,000.00
$200,000.00

Investment
Remaining Endowment
Loan from bank
Interest
Payment to the bank

option 1
$1,000,000.00
$200,000.00
$800,000.00
$48,000.00
$848,000.00

Future Cash Flow

$1,800,000.00

Total FV

$2,012,000.00

Virginia's best option for cash return is Option 3

Overall investment bst rate of return is Option 1

$952,000.00
95.20%

4
Investment
Loan from bank
Interest
Payment to the bank
Future Cash Flow from investment
Virginia's best option is Option 3
Overall investment bst rate of return is Option 1

option 1
$1,000,000.00
$1,000,000.00
$60,000.00
$1,060,000.00
$1,800,000.00
$740,000.00
74%

Based upon Question 4 figures, savers wouldchoose Option 1 as it offers highest return on investment
cash on hand and would choose Option 3. A compromise solution is to choose Option 2 for a balance
invstment
Correct Reply: 3 million for both Savers and Spenders. We have to find the FV Spenders and PV for S
option 3 is the best for both of them
6

New Investment
Future Cash Flow
Shares Outstanding
Recommend selling shares to generate cash

$2,500,000.00
$3,400,000.00
200,000.00

based upon a total future value of $4,612,000

$2.5 million/$23.06 = 108,413 shared will nee

Correct Reply:
positive investment 3.4 > 2.5 (2.5 + (3.4/1.06) = 0.707 --> profit)
Shares = Total Value / Shares = 5.15 / 200.000 = 25.75$
0.707 / 0.2 = 3.54
New Price after announcement = 29.29$
Number of new shares to issue = 2.5M / 29.29 = 85.346 new shares

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.

If Virginia does not want to borrow from the bank, she can spend a maximum of $2 million.
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.

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.

w much of the $4 million should Virginia invest in the restaurant?

option 2
$2,000,000.00
$2,000,000.00
$3,300,000.00
$2,120,001.00
$5,420,001.00

option 3
$3,000,000.00
$1,000,000.00
$4,400,000.00
$1,060,001.00
$5,460,001.00

option 4
$4,000,000.00
$0.00
$5,400,000.00
$0.00
$5,400,000.00

$3,113,208.00

$4,150,944.00

$5,094,340.00

$1,150,944.00

$1,094,340.00

$1,113,208.00

Virginia should choose Option 3, as this will offer the highest Future
Value and the highest Net Value of Investment

vestment in the retaurant?

ith $1 million cash in hand. She knows the future value of her investment will be $5,460,000

option 2
$2,000,000.00
$200,000.00
$1,800,000.00
$108,000.00
$1,908,000.00

option 3
$3,000,000.00
$200,000.00
$2,800,000.00
$168,000.00
$2,968,000.00

option 4
$4,000,000.00
$200,000.00
$3,800,000.00
$228,000.00
$4,028,000.00

$3,300,000.00

$4,400,000.00

$5,400,000.00

$3,512,000.00

$4,612,000.00

$5,612,000.00

$1,392,000.00
69.60%

$1,432,000.00
47.73%

$1,372,000.00
34.30%

option 2
$2,000,000.00
$2,000,000.00
$120,000.00
$2,120,000.00
$3,300,000.00

option 3
$3,000,000.00
$3,000,000.00
$180,000.00
$3,180,000.00
$4,400,000.00

option 4
$4,000,000.00
$4,000,000.00
$240,000.00
$4,240,000.00
$5,400,000.00

$1,180,000.00
59%

$1,220,000.00
41%

$1,160,000.00
29%

s it offers highest return on investment. Spenders would want the most

on is to choose Option 2 for a balance of cash on hand and retuen on

e to find the FV Spenders and PV for Savers, that canculations will tell us,

upon a total future value of $4,612,000, divided by 200,000 shares, each share is worth $23.06
llion/$23.06 = 108,413 shared will need to be sold to cover the cost of the investment

Balance Sheet
Cash: 1 M Liablities: 0
Rest: 4.15 Equity: 8.35 / 285.346 = 29.29
Ham: 3.2
Total: 8.35 Total: 8.35

up of her $2 million in
er future $3 million.

e of her future 3
Assuming interest
and Virginia can repay

he spends nothing