Reference:

Modified based on Cox, S., Foster, J., Burson, T., & Repede, J. (2018). A Tree Dies and a Pub

Suffers.

Journal of Case Studies

,

36

(2), 19+.

QUESTIONS

1.

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?