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    Case Analysis: Murphy Stores, Capital Project

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    ariba farrukh
    Murphy Stores has $7 million to allocate towards an EAS system, new energy-efficient store lighting, or a combination. The EAS system costs $4.6 million and lighting costs $6.99 million. We analyzed the projects using WACC, IRR, payback period, and discounted payback period. The analysis showed the EAS project has higher NPV, IRR, and shorter payback periods, making it the better investment option. While lighting also has a positive NPV, EAS returns outweigh it. Thus, the recommendation is to invest in the EAS system.

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    Case Analysis: Murphy Stores, Capital Project

    Uploaded by

    ariba farrukh
    96 views2 pages
    Murphy Stores has $7 million to allocate towards an EAS system, new energy-efficient store lighting, or a combination. The EAS system costs $4.6 million and lighting costs $6.99 million. We analyzed the projects using WACC, IRR, payback period, and discounted payback period. The analysis showed the EAS project has higher NPV, IRR, and shorter payback periods, making it the better investment option. While lighting also has a positive NPV, EAS returns outweigh it. Thus, the recommendation is to invest in the EAS system.

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    Murphy Stores has $7 million to allocate towards an EAS system, new energy-efficient store lighting, or a combination. The EAS system costs $4.6 million and lighting costs $6.99 million. We analyzed the projects using WACC, IRR, payback period, and discounted payback period. The analysis showed the EAS project has higher NPV, IRR, and shorter payback periods, making it the better investment option. While lighting also has a positive NPV, EAS returns outweigh it. Thus, the recommendation is to invest in the EAS system.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    96 views2 pages

    Case Analysis: Murphy Stores, Capital Project

    Uploaded by

    ariba farrukh
    Murphy Stores has $7 million to allocate towards an EAS system, new energy-efficient store lighting, or a combination. The EAS system costs $4.6 million and lighting costs $6.99 million. We analyzed the projects using WACC, IRR, payback period, and discounted payback period. The analysis showed the EAS project has higher NPV, IRR, and shorter payback periods, making it the better investment option. While lighting also has a positive NPV, EAS returns outweigh it. Thus, the recommendation is to invest in the EAS system.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 2

    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.

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