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Ginny´S Restaurant Essay

1179 words - 5 pages

1. The net present value of Virginia’s assets is approximately $4.83 million dollars. This value was obtained from summing the $2 million Virginia receives today plus the present value of the $3 million she will receive exactly one year from now. These calculations are depicted in Table A. Thus, Virginia has approximately $4.83 million dollars at her disposal to spend and consume today if she pleases. This figure takes into account how much she could borrow today in order to have exactly $3 million to pay back one year from now, plus the original $2 million she receives today. Of course, if she consumes nothing today, she will have a greater amount to spend in exactly one year. If Virginia ...view middle of the document...

78% increase, from a net present value of $4 million (if she did nothing) to around $5.15 million. Virginia should only deviate from this investment option if her indifference curves or preferences are such that she favors consumption now over future consumption. In this instance, the investment option she selects will depend on the strength of her preferences for consumption now. Question three examines this situation in greater detail.

3. Despite Virginia’s strong preference for current versus future consumption forcing her to consume at least $3.8 million immediately, the planned investment in Ginny’s Restaurant is still plausible and in fact profitable. Based on the analysis performed in question two, ideally she should invest $3 million into Ginny’s Restaurant. Calculations illustrated in Table C demonstrate that Ginny should consume the $3.8 million now, borrow $2.8 million, and combine that amount with the remaining $0.2 million of her endowment. Despite the fact that her current wealth decreases from approximately $4.15 million (not including the $1 million she didn’t invest) when she wasn’t governed by strong current consumption preferences to $1,350,943.40, she remains profitable. In fact she has little difficulty repaying all of the principal and additional interest at the 6% rate since future cash flows are known with certainty in her world. Even if the interest rate were higher, for example 10%, and Virginia follows the same borrowing and consumption behavior, her current wealth is $1.2 million. Although lending at these rates is a viable option, my analysis encourages Ginny to explore other lending options besides bank loans and possibly seek out borrowing money from family members or other supporters who would charge little or no interest. Even if they were to ask for a cut of Ginny’s Restaurant’s guaranteed future cash flow, Ginny would be able to avoid paying interest on the principal and could raise her current wealth closer to the original present value of her assets before she felt compelled to spend $3.8 million today.

4. In this situation, the fact that Virginia lacks the start-up $4 million endowment shouldn’t deter her from achieving her entrepreneurial goal. Assuming that the “necessary skills” which Ginny possesses to operate the restaurant include perseverance, passion for the restaurant business, self-confidence, an intense work ethic, risk-tolerance, and strong organizational skills, she should seriously consider embarking on this exhausting,...

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