IM Exhibit 1
Summary of Project Base Case Results
EAS Full Line Stores
Base case assumptions: Reduction in shrink 30%, shrink rate without EAS grows 0.1% per year,
EAS Hardware Stores
Base case assumptions: Reduction in shrink 30%, shrink rate without EAS grows 0.1% per year,
Lighting
Base case assumptions: Energy cost savings at average of estimated range (35%); energy costs
EAS Full Line EAS Full Line
Project Stores Stores EAS Full Line Stores
Differential Differential Differential Gross
Measure of Benefit Sales Costs Margin $
NPV $14,712,340 $3,811,088 $1,226,004
IRR 58% 27% 17%
Profitability Index 4.69 1.96 1.31
EAS grows 0.1% per year, base rate sales forecast
EAS grows 0.1% per year, base rate sales growth
ange (35%); energy costs rise with inflation
EAS Hardware EAS Hardware EAS Hardware
Stores Stores Stores Lighting
Differential Differential
Sales Differential Costs Gross Margin $ Cost Savings
$17,799,104 $9,743,226 $6,110,183 $1,151,539
97% 66% 50% 16%
9.00 5.38 3.75 1.16
IM Exhibit 2
EAS Full-Line Stores Base Case: Sales as Benefit Measure
Sales (23 Full-Line Stores) $ 500,000,000
Sales growth % 6%
Gross Margin 44.7%
Inflation 4%
Tax Rate 39%
Cost of Capital 12%
Shrinkage 3.60%
Shrinkage Decline 30.0%
Estimated Annual Growth in
Shrinkage Rate without EAS 0.10%
Capital Expenditure $ 3,036,000
Cost of Tags $1,564,000
Year 2006
0
Expected Revenue
% Shrinkage
Revenue Loss due to Shrinkage
Differential Revenue - Savings
from EAS
Differential Gross Profit
Differential Operating Expenses (Tags) 1,564,000
Depreciation MACRS %
Differential Depreciation
Differential EBIT
Differential Taxes (609,960)
Differential Change in
Operating Income after Taxes
Capital Expenditure (3,036,000)
Differential Free Cash Flow (3,990,040)
NPV $14,712,340
IRR 58%
Profitability Index 4.69
23 stores*$21.8 mm avg
sales
2007 2008 2009 2010
1 2 3 4
500,000,000 530,000,000 561,800,000 595,508,000
3.60% 3.70% 3.80% 3.90%
18,000,000 19,610,000 21,348,400 23,224,812
2,700,000 5,883,000 6,404,520 6,967,444
1,206,900 2,629,701 2,862,820 3,114,447
1,626,560 1,691,622 1,759,287 1,829,659
14.29% 24.49% 17.49% 12.49%
433,844 743,516 530,996 379,196
639,596 3,447,861 4,114,236 4,758,588
249,442 1,344,666 1,604,552 1,855,849
390,153 2,103,195 2,509,684 2,902,739
823,998 2,846,712 3,040,681 3,281,935
2011 2012 2013 2014 2015
5 6 7 8 9
631,238,480 669,112,789 709,259,556 751,815,129 796,924,037
4.00% 4.10% 4.20% 4.30% 4.40%
25,249,539 27,433,624 29,788,901 32,328,051 35,064,658
7,574,862 8,230,087 8,936,670 9,698,415 10,519,397
3,385,963 3,678,849 3,994,692 4,335,192 4,702,171
1,902,845 1,978,959 2,058,117 2,140,442 2,226,060
8.93% 8.92% 8.93% 4.46%
271,115 270,811 271,115 135,406 -
5,400,902 5,980,317 6,607,438 7,422,568 8,293,338
2,106,352 2,332,324 2,576,901 2,894,801 3,234,402
3,294,550 3,647,993 4,030,537 4,527,766 5,058,936
3,565,665 3,918,805 4,301,652 4,663,172 5,058,936
2016
10
844,739,480
4.50%
38,013,277
11,403,983
5,097,580
2,315,102
-
9,088,881
3,544,664
5,544,217
5,544,217
IM Exhibit 3
EAS Full-Line Stores Base Case: Cost Savings as Benefit Measure
Sales (23 Full-Line Stores) $ 500,000,000
Sales growth % 6%
Gross Margin % 44.7%
COGS % 55.3%
Inflation 4%
Tax Rate 39%
Cost of Capital 12%
Shrinkage 3.60%
Shrinkage Decline 30.0%
Estimated Annual Growth in
Shrinkage Rate without EAS 0.10%
Capital Expenditure $ 3,036,000
Cost of Tags $1,564,000
Year 2006
0
Expected Revenue
% Shrinkage
Revenue Loss due to Shrinkage
Differential Revenue - Savings
from EAS
Differential COGS - Savings Due to
Lower Merchandise Replacement
Costs
Differential Operating Expenses (Tags)
Depreciation MACRS %
Differential Depreciation
Differential EBIT
Differential Taxes
Differential Change in Operating
Income after Taxes
Capital Expenditure
Differential Free Cash Flow (3,990,040)
NPV $3,811,088
IRR 27%
Profitability Index 1.96
23 stores*$21.8 mm avg
sales
2007 2008 2009 2010 2011
1 2 3 4 5
87,789 1,242,594 1,294,360 1,382,122 1,500,227
2012 2013 2014 2015 2016
6 7 8 9 10
1,674,707 1,864,890 2,018,705 2,190,612 2,434,693
IM Exhibit 4
EAS Full-Line Stores Base Case: Gross Margin as Benefit Measure
23 stores*$21.8 mm avg
Sales (23 Full-Line Stores) $ 500,000,000 sales
Sales growth % 6%
Gross Margin 44.7%
Inflation 4%
Tax Rate 39%
Cost of Capital 12%
Shrinkage 3.60%
Shrinkage Decline 30.0%
Estimated Annual Growth in
Shrinkage Rate without EAS 0.10%
Capital Expenditure $ 3,036,000
Cost of Tags $1,564,000
Year 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
0 1 2 3 4 5 6 7 8 9 10
Expected Revenue
% Shrinkage
Revenue Loss due to Shrinkage
Differential Revenue - Savings
from EAS
Differential Gross Profit
Differential Operating Expenses (Tags) 1,564,000
Depreciation MACRS %
Differential Depreciation
Differential EBIT
Differential Taxes (609,960)
Differential Change in
Operating Income after Taxes
Capital Expenditure (3,036,000)
Differential Free Cash Flow (3,990,040) (86,793) 862,199 880,244 931,608 1,010,437 1,142,549 1,287,045 1,391,605 1,510,428 1,697,312
NPV $1,226,004
IRR 17%
Profitability Index 1.31
Note:
If you assumed that the benefit of reduced shrink was lower cost of goods,
you can estimate this value by putting the COGS % into cell C5 above.
At 55.3% cogs %, the NPV is $4.7mm and the IRR 30%
IM Exhibit 5
EAS Hardware Stores Base Case: Sales as Benefit Measure
(110 stores*$3.7 mm
Sales (Hardware Stores) $ 406,000,000 per store)
Sales growth % 9%
Gross Margin 40.8%
Inflation 4%
Tax Rate 39%
Cost of Capital 12%
Shrinkage 3.10%
Shrinkage Decline 30%
Estimated Annual
Growth in Shrinkage
Rate without EAS 0.1%
Capital expenditure $ 2,090,000
Cost of tags $ 220,000
Year 2006 2007
0 1
Expected Revenue 406,000,000
% Shrinkage 3.10%
Revenue Loss due to Shrinkage 12,586,000
Differential Revenue - Savings from EAS 1,887,900
Differential Gross Profit 770,263
Differential Operating Expenses (Tags) 220,000 57,200
Depreciation MACRS % 14.29%
Differential Depreciation 298,661
Differential EBIT 1,532,039
Differential Taxes (85,800) 597,495
Differential Change in
Operating Income after
Taxes 934,544
Capital Expenditure (2,090,000)
Differential Free Cash Flow (2,224,200) 1,233,205
NPV $17,799,104
IRR 97%
Profitability Index 9.00
2008 2009 2010 2011 2012
2 3 4 5 6
442,540,000 482,368,600 525,781,774 573,102,134 624,681,326
3.20% 3.30% 3.40% 3.50% 3.60%
14,161,280 15,918,164 17,876,580 20,058,575 22,488,528
4,248,384 4,775,449 5,362,974 6,017,572 6,746,558
1,733,341 1,948,383 2,188,093 2,455,170 2,752,596
62,348 67,959 74,076 80,742 88,009
24.49% 17.49% 12.49% 8.93% 8.92%
511,841 365,541 261,041 186,637 186,428
3,674,195 4,341,949 5,027,857 5,750,193 6,472,121
1,432,936 1,693,360 1,960,864 2,242,575 2,524,127
2,241,259 2,648,589 3,066,993 3,507,618 3,947,994
2,753,100 3,014,130 3,328,034 3,694,255 4,134,422
2013 2014 2015 2016
7 8 9 10
680,902,645 742,183,883 808,980,433 881,788,671
3.70% 3.80% 3.90% 4.00%
25,193,398 28,202,988 31,550,237 35,271,547
7,558,019 8,460,896 9,465,071 10,581,464
3,083,672 3,452,046 3,861,749 4,317,237
95,930 104,564 113,975 124,232
8.93% 4.46%
186,637 93,214 - -
7,275,452 8,263,118 9,351,096 10,457,232
2,837,426 3,222,616 3,646,928 4,078,320
4,438,026 5,040,502 5,704,169 6,378,911
4,624,663 5,133,716 5,704,169 6,378,911
IM Exhibit 6
EAS Hardware Stores Base Case: Cost Savings as Benefit Measure
(110 stores*$3.7 mm
Sales (Hardware Stores) $ 406,000,000 per store)
Sales growth % 9%
Gross Margin % 40.8%
COGS % 59.2%
Inflation 4%
Tax Rate 39%
Cost of Capital 12%
Shrinkage 3.10%
Shrinkage Decline 30%
Estimated Annual
Growth in Shrinkage
Rate without EAS 0.1%
Capital expenditure $ 2,090,000
Cost of tags $ 220,000
Year 2006 2007
0 1
Expected Revenue
% Shrinkage
Revenue Loss due to Shrinkage
Differential Revenue - Savings from EAS
Differential COGS -
Savings Due to Lower
Merchandise
Replacement Costs
Differential Operating Expenses (Tags) 220,000
Depreciation MACRS %
Differential Depreciation
Differential EBIT
Differential Taxes (85,800)
Differential Change in
Operating Income after
Taxes
Capital Expenditure (2,090,000)
Differential Free Cash Flow (2,224,200) 763,344
NPV $9,743,226
IRR 66%
Profitability Index 5.38
2008 2009 2010 2011 2012
2 3 4 5 6
1,695,762 1,825,616 1,993,297 2,196,601 2,455,338
2013 2014 2015 2016
7 8 9 10
2,743,623 3,027,968 3,348,502 3,745,397
IM Exhibit 7
EAS Hardware Stores Base Case: Gross Margin as Benefit Measure
(110 stores*$3.7 mm
Sales (Hardware Stores) $ 406,000,000 per store)
Sales growth % 9%
Gross Margin 40.8%
Inflation 4%
Tax Rate 39%
Cost of Capital 12%
Shrinkage 3.10%
Shrinkage Decline 30%
Estimated Annual Growth in
Shrinkage Rate without EAS 0.1%
Capital expenditure $ 2,090,000
Cost of tags $ 220,000
Year 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
0 1 2 3 4 5 6 7 8 9 10
Expected Revenue
% Shrinkage
Revenue Loss due to Shrinkage
Differential Revenue - Savings from EAS
Differential Gross Profit
Differential Operating Expenses (Tags) 220,000
Depreciation MACRS %
Differential Depreciation
Differential EBIT
Differential Taxes (85,800)
Differential Change in Operating
Income after Taxes
Capital Expenditure (2,090,000)
Differential Free Cash Flow (2,224,200) 551,446 1,218,924 1,289,620 1,391,357 1,521,189 1,698,105 1,895,311 2,078,317 2,286,142 2,557,733
NPV $6,110,183
IRR 50%
Profitability Index 3.75
Base Case Analysis - Lighting
IM Exhibit 8
Total Number of Stores 187
Installation Cost/Store 37,400
Total Cost (Capital Expenditure) 6,993,800
Cost per kwh 0.075
Inflation 4%
Tax rate 39%
Cost of capital 12%
Lighting
Average kwh 56.9
Annual hours of use 5100
Cost per kwh 0.075
Energy Cost 4,069,915
Reduction in Energy Consumption 35%
Savings from Lighting 1,424,470
Air Conditioning
Air Conditioning hours/yr/store 2000
Cost per kwh 0.075
Average Reduction in kw 9.5
Total savings from air conditioning 266,475
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
0 1 2 3 4 5 6 7 8 9 10
Total Energy Savings 845,473 1,758,583 1,828,926 1,902,083 1,978,167 2,057,293 2,139,585 2,225,168 2,314,175 2,406,742
Depreciation MACRS % 14.29% 24.49% 17.49% 12.49% 8.93% 8.92% 8.93% 4.46%
Depreciation 999,414 1,712,782 1,223,216 873,526 624,546 623,847 624,546 311,923 - -
Incremental EBIT (153,941) 45,801 605,711 1,028,558 1,353,620 1,433,446 1,515,039 1,913,245 2,314,175 2,406,742
Taxes (60,037) 17,863 236,227 401,138 527,912 559,044 590,865 746,166 902,528 938,629
Incremental Operating Profit after
Taxes (93,904) 27,939 369,484 627,420 825,708 874,402 924,174 1,167,079 1,411,647 1,468,113
Capital Expenditure (6,993,800)
Free Cash Flow (6,993,800) 905,510 1,740,720 1,592,699 1,500,946 1,450,255 1,498,249 1,548,720 1,479,003 1,411,647 1,468,113
NPV $1,151,539
IRR 16%
Profitability Index 1.16
IM Exhibit 9
Value Drivers Major risks/uncertainties for EAS involve assumptions about level and trend of shrink,
and of effectiveness of EAS in reducing theft, as well as sales growth rate.
Calculate the change in NPV from base model when you change each input by 1%
Major assumptions for lighting involve costs and future value of savings
EAS Full-line Stores (even if we are such how many KwH we save, we are uncertain about their future cost.
(These calculations are done using Gross Margin as benefit, but similar magnitude changes result
when you use Sales or Cost Savings as measure of benefits).
NPV with Driver of
NPV Base Change Project
Variable Change ($000s) ($000s) Value? Many more uncertainties (with larger consequences) with the EAS projects, then with lighting.
Sales growth 6% to 7% High Full Line Stores EAS is much more senstivie to assumption than Hardware EAS.
GM% 44.7% to 45.7% Medium
Tax rate 39% to 40% Low
Shrink rate 3.6% to 3.7% High
3.6% to 2.8% High
Reduction in shrink 30% to 29% High
Growth rate in shrink without EAS 0.1% to 0% High
Cost of tags 1564 to 1720 (1% incr) High
Discount rate 12% to 13% High
EAS Hardware Stores
(These calculations are done using Gross Margin as benefit, but similar magnitude changes result
when you use Sales or Cost Savings as measure of benefits).
NPV with Driver of
NPV Base Change Project
Variable Change ($000s) ($000s) Value?
Sales growth 9% to 10% Medium
GM% 40.8% to 41.8% Medium
Tax rate 39% to 40% Low
Shrink rate 3.1% to 3.2% Medium
3.1% to 2.3% High
Reduction in shrink 30% to 29% Medium
Growth rate in shrink without EAS 0.1% to 0% High
Cost of tags 220 to 222.2 (1% incr) Low
Discount rate 12% to 13% High
Lighting
NPV with Driver of
NPV Base Change Project
Variable Change ($000s) ($000s) Value?
Cost per kwh .075 to .085 Medium
Inflation 4% to 5% High
Tax rate 39% to 40% Low
Reduction in energy use light 35% to 36% Medium
Reduction in energy use AC 9.5 to 10.5 kw Low/Medium
Install Cost 37,400 to 37,774 /store (1%) Low
Discount rate 12% to 13% High
SCENARIO ANALYSIS
EAS Full-line (Differential Gross Margin as Benefit)
Base case assumptions: Reduction in shrink 30%, shrink rate without EAS grows 0.1% per year, base rate sales forecast
Best case assumptions: Reduction in shrink 40%, shrink rate without EAS grows 0.2% per year, 1% higher sales growth than base rate
Worst case assumptions: Reduction in shrink 20%, shrink rate without EAS grows 0% per year, 1% lower sales growth than base rate
BASE BEST WORST
NPV $1,226,004 $7,142,453 ($3,444,963)
IRR 17% 36% -17%
Profitability Index $ 1.31 $ 2.79 $ 0.14
EAS Hardware (Differential Gross Margin as Benefit)
Base case assumptions: Reduction in shrink 30%, shrink rate without EAS grows 0.1% per year, base rate sales growth
Best case assumptions: Reduction in shrink 40%, shrink rate without EAS grows 0.2% per year, 1% higher sales growth than base rate
Worst case assumptions: Reduction in shrink 20%, shrink rate without EAS grows 0% per year, 1% lower sales growth than base rate
BASE BEST WORST
NPV $6,110,183 $10,713,450 $2,560,319
IRR 50% 66% 32%
Profitability Index $ 3.75 $ 5.82 $ 2.15
Lighting
Base case assumptions: Energy cost savings at average of estimated range (35%); energy costs rise with inflation
Best case assumptions: Energy costs grow at forecast inflation + 2% (6%), energy savings at high end of range
Worst case assumptions: Energy costs grow at half forecast inflation rate (3%), low end of energy savings
BASE BEST WORST
NPV $1,151,539 $2,198,215 $177,749
IRR 16% 19% 13%
Profitability Index $ 1.16 $ 1.31 $ 1.03
PROJECT LIFE
Analysis of Base case models run with 7 year MACRS life rather than 10 year life.
Anything shorter than 7 years would then trigger depreciation recapture provisions.
EAS Full Line Stores
Benefit Measure Gross Margin $
Base Case 10 year life
NPV $ 1,226,004
IRR 17%
Profitability Index $ 1.31
MACRS 7 year life
NPV $ 134,840
IRR 13%
Profitability Index $ 1.03
EAS Hardware Stores
Benefit Measure Gross Margin $
Base Case 10 year life
NPV $ 6,110,183
IRR 50%
Profitability Index $ 3.75
MACRS 7 year life
NPV $ 4,462,255
IRR 48%
Profitability Index $ 3.01
Lighting Sales
Base Case 10 year life
NPV $1,151,539
IRR 16%
Profitability Index 1.16
MACRS 7 year life
NPV $ 169,792
IRR 13%
Profitability Index $ 1.02
Write Conclusions and Actual Results
