Ginny’s Restaurant

1. What is Virginia’s current wealth (equivalently, what is the present value of her assets)? How much money can she spend and consume today? How much of the money can she spend and consume one year from today if she consumes nothing today?

A) Virginia’s current wealth is $4,830,188.68

2,000,000.00

PV of 3M @ 6% 2,830,188.68

4,830,188.68

B) She can spend only the 2,000,000 that she currently has.

C) She can spend the 2,000,000 that she receives today, plus the interest on that amount, which is 120,000, and the 3,000,000 that she will receive in 1 year.

FV of 2M @ 6% 2,120,000

3,000,000

5,120,000

2. How much of the $4 million should Virginia invest in the restaurant? What happens to Virginia’s wealth when she makes the investment in Ginny’s Restaurant?

A) Scenario 1

Today 1 Year

1,000,000 in Ginny’s 1,800,000

3,000,000 @ 6% 3,180,000

4,980,000

Scenario 2

2,000,000 in Ginny’s 3,300,000

2,000,000 @ 6% 2,120,000

5,420,000

Scenario 3

3,000,000 in Ginny’s 4,400,000

1,000,000 @ 6% 1,060,000

5,460,000

Scenario 4

4,000,000 in Ginny’s 5,400,000

Investing $3,000,000 in Ginny’s Restaurant would be the wisest decision since it will leave her with the largest amount of wealth.

B) Virginia will have a 1,000,000 balance if she invests 3,000,000 in the restaurant. That 1,000,000 will be invested at 6% and will be worth 1,060,000 at the end of the year. The 3,000,000 will have grown to 4,400,000 which brings her total wealth to 5,460,000.

3. Suppose that Virginia has a strong preference for current versus future consumption, and would like to consume at least $3.8 million immediately. Is this consumption possible, in light of the planned investment in Ginny’s Restaurant?

Initial 4,000,000

Used 3,800,000...