GINNY’S RESTAURANT: AN INTRODUCTION TO
CAPITAL INVESTMENT VALUATION

1) Virginia has current assets worth $4.83 million at present. This value of her assets is calculated by adding $2 million she receives today to the present value of $3 million which she will get at the end of one year.

Cash on hand (today) = $2 million
Cash after one year = $3 million
Rate of interest = 6%

Net Present Value (NPV) = $2M + $3M/ (1+0.06) = $4,830,188.68

Virginia can spend or consume maximum $4.83 million which is the value of her total asset at present. Here, she can borrow $2.83 million (present value of $3 million) from bank which she can repay with the money she will be getting after exactly one year. The rest of the money ($2 million) she has already possessed. However, if she does not want to borrow money from bank, the maximum amount she can spend today is $2 million.

If Virginia does not spend any money today, she can spend the at least $5.12 million which is the future value of $2 million plus $3 million which she will get after one year.

Total value of money after 1 year = $2M (1+0.06) + $3M = $5,120,000

2) Virginia should invest $3,000,000 in Ginny’s Restaurant. In one year the $4,000,000 will be worth $4,240,000 without investing it. If Virginia invests $3,000,000 in Ginny’s Restaurant it will give her a future cash flow of $5,460,000.00. This investment will yield the largest amount of money at the end of one year.

Virginia’s wealth will increase 29% if she chooses option 3. | Option 1 | Option 2 | Option 3 | Option 4 | Investment | $1,000,000 | $2,000,000 | $3,000,000 | $4,000,000 | Remaining Cash | $3,000,000 | $2,000,000 | $1,000,000 | $0 | Future Cash Flow | $1,800,000 | $3,300,000 | $4,400,000 | $5,400,000 | FV of Remaining Cash | $3,180,000 | $2,120,000 | $1,060,000 | $0 | | | | | | Total FV |