Question
Robin Briggs, a wealthy private investor, had been approached by Union Finance Company on the previous day. It seemed that Union Finance was interested in
Robin Briggs, a wealthy private investor, had been
approached by Union Finance Company on the
previous day. It seemed that Union Finance was
interested in loaning money to one of its larger clients,
but the clients demands were such that Union could
not manage the whole thing. Specifically, the client
wanted to obtain a loan for $385,000, offering to repay
Union Finance $100,000 per year over 7 years.
Union Finance made Briggs the following
proposition. Since it was bringing Briggs business, its
directors argued, they felt that it was only fair for
Briggs to put up a proportionately larger share of the
money. If Briggs would put up 60% of the money
($231,000), then Union would put up the remaining
40% ($154,000). They would split the payments
evenly, each getting $50,000 at the end of each year for
the next 7 years.
a. Union Finance can usually earn 18% on its
money. Using this interest rate, what is the net
present value of the clients original offer to
Union?
b. Robin Briggs does not have access to the same
investments as Union. In fact, the best available
alternative is to invest in a security earning
10% over the next 7 years. Using this interest
rate, what is Briggss net present value of the offer made by Union? Should Briggs accept the offer?
c. What is the net present value of the deal to
Union if Briggs participates as proposed?
d. The title of this case study is The Value of
Patience. Which of these two investors is more
patient? Why? How is this difference exploited
by them in coming to an agreement?
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