Jim Foster is the owner of Selwyn Pub in North Carolina. Jim's family was the owner of the pub

for over four decades. The distinguishing feature of the Selwyn Pub is the massive oak tree in

front of the pub, its branches and leaves cascading over the side walk. The tree became the arbor

for outdoor dining and pub services, giving a natural gift of green shade and breeze through the

hot summer months and cool sunshine in early Fall and late Spring. The outdoor area was

approximately 50 feet by 50 feet. Each table occupies 12 feet by 8 feet, seating 22 tables.

Over the years, Jim noticed that the tree was not as abundant and despite repeatedly service from

expert arborists (tree doctors), the tree was in failing health. The past expenses over these years

totaled $5,000. The town decided that the tree was danger to property and people and decided on

its imminent removal.

Foster was convinced that nothing would replace the tree to his business and to its patron.

However, will the removal of the tree offer opportunities for his business? Clearly, each

replacement would involve different costs and benefits to his business. These are some of the

thoughts Foster considered.

Using your knowledge of marginal analysis and present value analysis for the evaluation

of extant decisions (potential investment), evaluate the alternatives presented above and

recommend to Foster the best rational decision.

Use a 7% annual discount rate for

calculating Net Present Value.

Hint: Use excel function =NPV to calculate the PV of

future cash flows over the 12 months. Use the annual cost of bank funds, adjusted to a

monthly rate, as the discount rate.

2. Has Foster included all associated marginal costs in his analysis?

3. What risks would the bank consider in evaluating the loan application?

4. What cognitive biases should Foster be on the lookout for during the decision making

process? Explain your reasoning.

5. What is the Economic profit per month of alternative A?