Murphy Stores Capital Projects Case Solution

1. Provide the synopsis of the case and state the issue(s). 

The main issue here for the Murphy Stores is what set of assumptions and estimations the company would incorporate, as any erroneous application would directly impact the profitability of the investment opportunities where the $7 million would be invested. Apart from the quantitative factors, it is vital that the stakeholders also inculcate the non-quantitative impacts in order to better realize whether these projects would be meeting the company’s future objectives and missions of sustainability and whether they are in line with the company’s values, which it endorses. The questions below further discuss the detailed opportunities and weaknesses of both of the available options in which Murphy Stores could invest their money and which would be the most suitable for their operations in the current scenario. The case mainly describes the thorough financial aspects of both prospects in terms of the WACC that the company has estimated and the costs related to these projects. These projects are then further analysed through various financial avenues. i.e., Net Present Value (NPV), Internal rate of return (IRR), and the profitability index and also carried out scenario analysis to better comprehend the prospects from a wide financial perspective. Apart from that, comprehensive risks and uncertainties are discussed, which are the non-quantitative characteristics deemed necessary for the final decision-making. And is concluded with recommendations for Murphy Stores to be successful at the end by ensuring that all of the risks are discussed and covered, to make sure that the fears involved are better catered to.

2. Describe the two investment opportunities and why each of them has appeal for Murphy Stores.

The company has around $ 7 million, which it has to invest, and according to the case, there are two investment opportunities available, which the finance manager of the company is evaluating. One of the projects is to invest in “Electronic Article Surveillance (EAS)”; this would be an advanced technology that would result in minimizing the number of burglaries from their retail outlets, which has recently become quite a big challenge for Murphy Stores to control. And with the implementation of this robust technology, the company would be able to enjoy several advantages. For instance, there will be better revenue in terms of “differential sales”, and the company would be able to save a substantial amount in terms of its “cost of sales” involved and, resultantly, would enjoy improved gross profits.

Secondly, the company has another option to invest its $ 7 million, and this is where the amount will be used for cost savings by installing “energy efficient lighting” in all of its warehouses and outlets involved. As a result, the demand for lighting resources would reduce by almost “30-40%”, and obviously would improve the visibility in the stores and warehouses and also reduce the consumption of the air conditioning installed, which are the major expenses comprising the total energy costs of the company. Furthermore, since the company has objectives, endorses energy conservation, and has multiple sustainability goals, implementing such technology will allow Murphy Stores to support the abovementioned objectives. 

Both options are equally important and feasible and support the objectives of the Murphy Stores. However, it is important that the finance manager is able to carefully analyse strong financial numbers and also some of the non-quantitative factors that would be more fruitful in the longer time and be more sustainable for the company. As the money ($ 7 million) is a much big amount, and if not invested wisely currently, then this could have serious consequences for the company in the longer term, as the cost of energy and also the costs from the burglaries in their retail outlets are both major issues that company is currently facing. 

3. Calculate the WACC for Murphy Stores and compare it with the 12 % assumption the company made for project submissions.