I have a case Study for "Murphy Stores: Capital Projects" that I'm supposed to do a report on and I'm struggling with one part; b Option 3 "Struggling with": Installing EAS in both full-line and hardware stores for a total of $6.91 million. (essentially the entire budget)

Notes:
I was asked to do an assessment between two projects that I assumed are on a 10-year life expectancy and a 7-year MACRS schedule, with just over $3 million would be depreciated on a modified accelerated cost recovery system (MACRS) schedule. Also, I assumed that there is no depreciation in the first 3 years, so after the first 3 years, the depreciation value would be $428,572 per year for 7 years for EAS.

For lighting, depreciation would be on a seven-year MACRS basis, I also assumed the same ($3 million depreciation) for lighting replacement.
I'm in the second stage of the proposed EAS initiative where they would install the systems in 23 full-line stores and/or 110 hardware stores in 2007.

The only significant cash expense item going forward was the ongoing cost of tags, which needed to be replaced each year in both full-line and hardware stores. (Only 1⁄4 of tags would need to be replaced in hardware stores on a yearly basis).

Using the PW comparison to compare alternatives, so we can make assumptions to make this work. Both cases only have 6 months savings in the first year (i.e. total savings for 1st year divided by 2)

EAS stats:
- EAS cost for Full-line stores: $4.6 million
- EAS cost for hardware stores: $2.31 million
- Total cost to install EAS in both hardware and full-line stores: $6.91 million
- On average (based on other industry estimates), shrink (stolen merchandise) is reduced by 20%-50% after EAS is installed. Shrink accounts for about 3.1% of total merchandise sales for Hardware stores, and about 2.8% for full-line stores in 2006.
- 2007 sales for full-line stores were expected to be $500 million
- Inflation was expected to be an average of 4%; sales in full-line stores were expected to grow at 6% annually (including inflation). (inflation only has to be considered in the calculation of PW)
- Hardware stores expected sales in 2007 are $406 million ($3.7 million times 110 stores). Sales were expected to grow at 9% annually (including the 4% inflation).
*Hardware store gross margins were 40.8% (Not sure if this important)

- If we use the 2.8% shrink from 2006, that is $500 million x 0.028 = $14,000,000 in stolen goods.
- If we take the lower number and say that EAS will reduce shrink by 20%, the new shrink % is 2.24% for full-line stores.
- $500 million x 0.0224 = $11,200,000. A $2,800,000 minimum in recovered losses with the EAS in just full-line stores.

Assume shrink is reduced by (20% + 50%)/2 for ease of calculation?
-Maybe we could assume the reduction in stolen goods as the savings in PW calculation? (assuming a constant 35% reduction for 10 years after EAS is installed)
-To make this work, we also have to assume that at least 500 million is made in full-line stores for the next 10 years, and at least 406 million is made in hardware stores over
the next 10 years.

For hardware stores, assume a 3.1% reduction in shrink after 1st year then (0.35)(0.031)=0.01085 reductions in shrink in the following 9 years, that is 12.59 million (divided by 2 = 6.3 million) in shrink savings in the first year and 4.41 million in savings for the following 9 years.
- Use the same approach for full-line stores, assume a 2.8% reduction in shrink for 1st year then (0.35)(0.028) reduction in shrink for the following 9 years. That is 14 million (divided by 2 = 7 million) in shrink savings in the first year and 4.9 million in savings for the following 9 years.

The lighting Replacement is now complete.
I'm struggling with the Alternatives, but I have created an answer to options 1 and 2:

1: Install EAS in only the full-line stores which would cost $4.6 million. This leaves $2.4
million in the budget for lighting upgrades which is enough to upgrade 64 stores.
2: Install EAS in only the Hardware stores which would cost $2.31 million. This leaves
$4.69 million to install lights in 125 stores.

Option 3 "Struggling with": Install EAS in both full-line and hardware stores for a total of $6.91 million. (essentially the entire budget)

Answer rating: 100% (QA)

Answer Option 3 Installing EAS in both fullline and hardware stores for a total of 691 million When considering option 3 it is important to first look ... View the full answer