Ginny's Restaurant & Virginia Investments

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

1)
$

2)

1
2
3
4

Interest
Investment today
$
$
$
$
$

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

6%
Future Cash
Flow (end of Yr)
$
$
$
$

Return

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

80%
65%
47%
35%

Present Value of
FCF
$
$
$
$

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

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 intere
Virginia's Wealth will grow maximum by
$
1,220,000 or return of
3)

If Virginia wants to use 3.8 Mil immediately, then she will not have the necessary amount to inve
Future Value in 1 Year
Cash in hand
$ 4,000,000
Invest in Ginny
$ 3,000,000 $
4,400,000
Balance
$ 1,000,000 $
1,060,000
Borrow
$ 2,800,000 $
2,968,000
Net Total
$
2,492,000

Recommendation:

4)

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

Virginia can leverage the balance $2.8 Mil via a bank loan. But
Nevertheless, the simulation shows that she w

$
$
$
$
$

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

Even upon borrowing, investing $ 3 Million by borrowing via a bank loan still looks the best optio
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)
47%
Restaurant
$ 3,000,000 $
4,400,000
6%
Cash
$ 1,000,000 $
1,060,000
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 an
As for a compromise, it is not difficult as some amount of the returns (more than 6% + inflation r
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) $
$
566,038

3,066,038

Virginia should invest in this venture as there is positive NPV.

For investment, she should look at using the outstanding stocks
Even after paying a dividend of $.75 / share (6% returns) the NPV

year from now

Balance
$
$
$

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

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%

alance in simple interest gives the highes yield of $ 5.46 Mil

36.5%
when there is a balanced investment in the restaurant and simple interest growth

essary amount to invest in Ginny

1
Scenario
$ 1,000,000
Cash
$
200,000
Loan
$
800,000
To be repaid
$
848,000
FCF
$ 1,800,000
Balance
$
952,000
PV
$
898,113

$
$
$
$
$
$
$

2
2,000,000
200,000
1,800,000
1,908,000
3,300,000
1,392,000
1,313,208

$
$
$
$
$
$
$

3
3,000,000
200,000
2,800,000
2,968,000
4,400,000
1,432,000
1,350,943

$
$
$
$
$
$
$

4
4,000,000
200,000
3,800,000
4,028,000
5,400,000
1,372,000
1,294,340

Mil via a bank loan. But will be left with less money than started at the end of the year.
lation shows that she will have most when she invests 3 Mil in Ginny

$
$
$
$
$

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

ill looks the best option.

e maximum Returns

urn for both parties and will also result in maximum dividend being realised
e than 6% + inflation rate) could be considered as dividend returnable to stakeholders

ere is positive NPV.

he outstanding stocks to raise the required money
e (6% returns) the NPV is still positive indicating the robustness of plan

ple interest growth