Today is December 16, 2008. Ms. Whitney Wright, the CEO of Best-in-Class Caf (BICC), needs to make a decision on the viability of one of her restaurants before the end of the year. The North Carolina Clean Air Act of 2007 requires all restaurants to meet designated air quality standards by January 1, 2009. Five of six BICC restaurants passed the air quality test. The Greenville caf failed the test. To come up to standards will require a $250,000 in new equipment to upgrade to its heating, air conditioning, and ventilation system. Ms. Wright hired

Raghu and Gulen Consultants (RGC) to analyze the future of the Greenville cafe. RGC has submitted a report that includes revenue and expense projections for the cafe under different scenarios to help guide her decision of whether to invest in the upgrade. The alternative to the purchasing the new equipment is to close the restaurant. The RGC report also provides recommendations for a new marketing campaign. RGCs report was finalized yesterday at as total cost of $54,500. The payment of $54,500 is due on January 1, 2009.

After twenty years of experience in management working for a well-known chain of sit-down restaurants, Ms. Wright moved to North Carolina and opened her own restaurant in Nags Head. Nags Head is a relatively affluent retirement and vacation area on the North Carolina shore.

BICC uses the highest quality ingredients and maintains a high ratio of waiters to customers. In

return, BICC is able to command premium pricing relative to its competitors. After the success

of the initial BICC, Ms. Wright opened five other restaurants in North Carolina, with locations in

Emerald Isle, Morehead City, Greenville, Pinehurst, and Wilmington. All of the locations have

been profitable with the exception of Greenville, which has been a borderline case.

The Greenville BICC is managed by Mr. Skipper Holmes. One recommendation in RGCs report is to invest in a marketing campaign in Greenville, which Mr. Holmes has been advocating. The Greenville cafe follows the same premium pricing strategy as the other five locations. However, RGC has recommended a more aggressive marketing effort given the highly competitive nature of the Greenville market.

The consulting team has viewed the revenue projections in scenarios and has provided probabilities associated with each scenario. These are given in Exhibit 1. The worst case scenario suggests that the new marketing efforts will achieve no revenue growth as does the worst case scenario with no new marketing campaign. The Greenville cafs revenues in 2008 were $900,000.

The marketing campaign will involve an initial get out the word campaign at a cost of $50,000 in 2009. That will be followed by promotional expenditures of $20,000 each year from 2010 onwards.

A further complication for BICC is that the Greenville caf will close on December 31, 2013 regardless of any other decision. The city has approved a change in zoning that is effective

January 1, 2014. The rezoning will require the caf to close at that time.

RGC estimates that the building that houses the Greenville facility can be sold today for $800,000. RGC also estimates that the building will be worth $900,000 five-years from now.

BICC purchased the building 3 years ago (on December 31, 2005) for $1,000,000. The building is being depreciated on a straight line basis to $0 over 8 years.

The new equipment for the air handling/ventilation system will be depreciated on a straight line basis to $0 over a 10-year period. Ms. Wright expects that the equipment can be sold for $70,000 at the end of 2013 although she expects that the equipment will actually be used in one of the other BICC cafs. BICC expects an increase in net working capital equal to 20% of 2009 expected revenue and Ms. Wright thinks no additional expenditures on net working capital will occur in the next five years. As of today, the Greenville cafe has $180,000 of net working capital. Costs of goods sold equals 75% of revenue.

RGC estimates that BICCs nominal cost of capital is 12%. RGC expects that nominal sales and variable costs will remain constant over the next three years. Starting four years from now RGC anticipates that the cafe will experience a 5% increase in revenues and associated variable costs

per year. BICC has a tax rate of 34%.

Exhibit 1: Projected Scenarios for Greenville Cafe

2009 Revenue 2009 Revenue

Probability (with new marketing campaign) (no new marketing campaign)

30% 1,200,000 1,100,000

50% 1,000,000 950,000

20% 900,000 900,000