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Ginnys Restaurant (Assignment)

1. Money in hand today = $2 million = C0Money to come after one year = $ 3 million = C1

Rate of interest (Discount Rate) = 6% (assuming p.a.) = r

Net present value (NPV) = C0 + C1/ (1+r)

= 2 + 3/(1+.06)

= $4.83 million

Total value of money after 1 year = C0*(1+r)+C1

=2*(1+.06)+3

= $5.12 million

: Money she can consume today = $4.83 million

: Money she can consume after 1 year = $5.12 million

2. How much should she investInvestment

(today) = i

Pay back (after

1 year) = p

IRR = (p-i)/i NPV @6%

discount rate

$1 $1.8 80% $4.7$2 $3.3 65% $5.11

$3 $4.4 47% $5.15

$4 $5.4 35% $5.09

(All amounts in $ millions)

Since the NPV is highest with option 3 ($3 million), she should invest

$3 million.

3. After using $ 3.8 million, she is left with only $200,000. Since she cantinvest such a small amount, she need a loan from bank.

As the current bank rate is 6% and her IRR on option 3 is 47% (which is

> than ^%), she should take a loan and go with option 3.

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4. Best investment after loan:Investment

(today) = i

Pay back

(after 1

year) = p

IRR = (p-i)/i Loan

amount

NPV @6%

discount rate

$1 $1.8 80% $1 $.698

$2 $3.3 65% $2 $1.11

$3 $4.4 47% $3 $1.15

$4 $5.4 35% $4 $1.09

(All amounts in $ millions)

Even after taking loan, her NPV is positive and highest in option 3, she

should take a $3 million loan and invest $3million.

Submitted by: Dr. Rahul K Garg

Section B