Case Study – The Value of Patience Robin Briggs, a wealthy private investor, had been approached by Union Finance Compan
Posted: Thu Apr 28, 2022 1:38 pm
Case Study – The Value of Patience
Robin Briggs, a wealthy private investor, had been approached by
Union Finance Company (UFC) on the previous day. It seemed that UFC
was interested in loaning money to one of its larger clients, but
the client’s demands were such that UFC could not manage the whole
thing. Specifically, the client wanted to obtain a loan for
$385,000, offering to repay UFC $100,000 per year over 7 years.
UFC 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 UFC
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.
Source: Clemen & Reilly (2014), Chapter 2, pages 42 -43
Questions:
Using this interest rate, what is
Briggs’s NPV of the offer made by UF. Should Briggs accept the
offer?
Robin Briggs, a wealthy private investor, had been approached by
Union Finance Company (UFC) on the previous day. It seemed that UFC
was interested in loaning money to one of its larger clients, but
the client’s demands were such that UFC could not manage the whole
thing. Specifically, the client wanted to obtain a loan for
$385,000, offering to repay UFC $100,000 per year over 7 years.
UFC 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 UFC
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.
Source: Clemen & Reilly (2014), Chapter 2, pages 42 -43
Questions:
Using this interest rate, what is
Briggs’s NPV of the offer made by UF. Should Briggs accept the
offer?