Submitted by: Ariba, Daniyal, Humaira Parvaiz, Minhaj, Zahra Waheed - 16817

CASE ANALYSIS: MURPHY STORES, CAPITAL PROJECT

This case is about Murphy Stores which is a major retailing store. At present they have a total of $7
million that they need to allocate in either of the following:

1. Investment in EAS system

2. Invest in new energy-efficient store lighting
3. Combination of the above two (since they are both not mutually exclusive)

The total cost of EAS system was $4.6 million and lighting costed around $6.99 million. The two
alternative investments focus on making financial improvements in two different aspects of Murphy
Stores' operations: decreasing "shrink" due to theft and saving on electricity costs. We need to discuss
trade-offs between selecting lower-risk capital projects and higher risk projects with higher expected
returns but more variability in potential outcomes.

We analyzed both the projects on the basis of WACC, IRR on the cash flows, payback period and the
discounted payback period of the projects. The WACC calculated was 11.1435%. We estimated the rate
of equity using the CAPM model which came out to be 12.9%. After that, we did a scenario analysis of
both the alternatives.

In Lighting, since it was mentioned that you can save the cost from 30% to 40%, we estimated the cash
flows in both the scenarios and also and took out the average of the cost saving percent, that is 35%,
and estimated that too in order to find the cash flows after average cost saving. The average values were
as follows:

NPV $2,145,650
IRR 17.58%
Payback period 4 years and 8 months
Discounted Payback period 6 years and 10 months

In case of the EAS system, it was mentioned in the case that the cost saving was from 20% to 30%. So we
took three separate scenarios which were; 20% cost saving, 50% cost saving and their average that is
35% cost saving and did the same analysis as mentioned above. We did not consider depreciation in our
calculations as the salvage value was zero. The average values were as follows:

Combined NPV $14,350,000.53

Combined IRR 47%
Payback period 2 years and 7 months
Discounted Payback Period 3 years 1 month

As you can tell from the figures above, the benefits of the EAS project clearly outweighs the benefits of
the lighting project. The EAS project has a higher NPV value for all scenarios in comparison with lighting
project except for 20% shrink reduction for full line store with deprecation deduction where NPV is
negative, thus, the project should not be continued. The IRR for the EAS project is also way higher than
the IRR for the lighting project, which means that the returns are more than the cost of capital as
compared to the lighting system and higher the net cash flows to the investors. The Payback period of
Submitted by: Ariba, Daniyal, Humaira Parvaiz, Minhaj, Zahra Waheed - 16817

EAS project are also very low in comparison with lighting projects. The company also has a policy of
deferring positive NPV projects so lighting project can also be an option for next year. So, if we are asked
to choose from either of these projects we will go for the EAS project.