Ginny's Restaurant & Virginia Investments

1)

2)

1
2
3
4

Interest
Present Value
Today's Wealth

0
1
$ 2,000,000 $
3,000,000
6%
6%
$ 2,000,000 $
2,830,189
$ 4,830,189 She can spend and consume today

One Year from now

Total Wealth

$ 2,120,000 $
3,000,000
$ 5,120,000 is what she will have one year from now

Interest
Investment today

6%
Future Cash
Flow (end of

$
$
$
$
$

4,000,000
1,000,000
2,000,000
3,000,000
4,000,000

$
$
$
$

Return

1,800,000
3,300,000
4,400,000
5,400,000

80%
65%
47%
35%

Present Value
of FCF
$
$
$
$

Balance

1,698,113 $
3,113,208 $
4,150,943 $
5,094,340

3,000,000
2,000,000
1,000,000

The NPV is highest when 2 million is invested in Ginny's restaurant.

But in terms of Future Cash Flows, investing 3 million in Ginny's and the balance in simple interest gives the highes yield
Virginia's Wealth will grow maximum by
$
1,220,000 or return of
36.5%
3)

If Virginia wants to use 3.8 Mil immediately, then she will not have the necessary amount to invest in Ginny
Future Value in 1 Year
Scenario
Cash in hand
$ 4,000,000
Invest in Ginny
$ 3,000,000 $
4,400,000
Cash
Balance
$ 1,000,000 $
1,060,000
Loan
Borrow
$ 2,800,000 $
2,968,000
To be repaid
Net Total
$
2,492,000
FCF
Balance
PV
Recommendation:
Virginia can leverage the balance $2.8 Mil via a bank loan. But will be left with less mon
Nevertheless, the simulation shows that she will have most when she

4)

Scenario
Bank Loan
Interest / Disc Rate
Amount to be ret
Future Cashflow from Ginny
Net Cash in hand
Present Value

1
$ 1,000,000
6%
$ 1,060,000
$ 1,800,000
$
740,000
$
698,113

$
$
$
$
$

2
2,000,000
6%
2,120,000
3,300,000
1,180,000
1,113,208

$
$
$
$
$

3
3,000,000
6%
3,180,000
4,400,000
1,220,000
1,150,943

$
$
$
$
$

4
4,000,000
6%
4,240,000
5,400,000
1,160,000
1,094,340

Even upon borrowing, investing $ 3 Million by borrowing via a bank loan still looks the best option.

5)

From the above analyses we know that Scenario 3 in all cases provides the maximum Returns
The Savers would prefer this the most.
The Spenders would like to have maximum Dividend (funds that are not invested)
Investment
FCF (+1 yr)
Restaurant
$ 3,000,000 $
4,400,000
47%
Cash
$ 1,000,000 $
1,060,000
6%
Total
$ 4,000,000 $
5,460,000
37%
PV
$
5,150,943
NPV
$ 1,150,943
Profit end of 1 Year
$ 1,460,000

From the analyses it is clear that investing $ 3 Mil $ provides maximum return for both parties and will also result in max
As for a compromise, it is not difficult as some amount of the returns (more than 6% + inflation rate) could be considere
6)

Biz Case:
Smoked Ham biz
Interest / Disc Rate
Present Value
NPV
Leverage:
Outstanding Shares
Raising from Capital markets
Price / Share
Interest Given
Dividend
NPV (after dividend payout)
Recommedation:

Investment
FCF
$ 2,500,000 $
$ (2,500,000) $
$
707,547

3,400,000
6%
3,207,547

200,000
$ 2,500,000
$
12.5
$
150,000
$
0.75

$ (2,500,000) $
3,066,038
$
566,038
Virginia should invest in this venture as there is positive NPV.
For investment, she should look at using the outstanding stocks to raise the required mo
Even after paying a dividend of $.75 / share (6% returns) the NPV is still positive indicatin

NPV
$
$
$
$

Future Value

$
4,698,113 $
5,113,208 $
5,150,943 $
5,094,340

4,240,000
3,180,000
2,120,000
1,060,000

Net Future
Value
$ 4,240,000
$ 4,980,000
$ 5,420,000
$ 5,460,000 Max Return
$ 5,400,000

6%
25%
36%
37%
35%

e interest gives the highes yield of $ 5.46 Mil

when there is a balanced investment in the restaurant and simple interest growth

t to invest in Ginny
1
2
3
4
$ 1,000,000 $ 2,000,000 $ 3,000,000 $ 4,000,000
$ 200,000 $
200,000 $ 200,000 $ 200,000
$ 800,000 $ 1,800,000 $ 2,800,000 $ 3,800,000
$ 848,000 $ 1,908,000 $ 2,968,000 $ 4,028,000
$ 1,800,000 $ 3,300,000 $ 4,400,000 $ 5,400,000
$ 952,000 $ 1,392,000 $ 1,432,000 $ 1,372,000
$ 898,113 $ 1,313,208 $ 1,350,943 $ 1,294,340
an. But will be left with less money than started at the end of the year.
hat she will have most when she invests 3 Mil in Ginny

arties and will also result in maximum dividend being realised

flation rate) could be considered as dividend returnable to stakeholders

NPV.
stocks to raise the required money
the NPV is still positive indicating the robustness of plan