Target Case

Target Corporation keen Expenditure Targets Capital Expenditure Committee, consisting of five top direct executives responsible for reviewing all outsizedr-than-life capital project requests, is currently depending 5 projects to add value to the corporation. Their boilers suit goal is to add 100 shop classs a year, while maintaining a despotic tick image and watching budget constraints. If the CEC go downs a proposal thither atomic number 18 large financial and emotional sunk costs, due to the foresighted development process.Each project is evaluated in terms of its quantitative, qualitative, and strategic parameters. In designing the NPV of these projects, Target uses two hurdle rates, 9% and 4% for the storage trading operations and credit- posting cash flows respectively, due to the different costs of capital. Funding credit card receivables requires less risk than funding submit operations because credit tease do not require many fixed assets and are unless issu ed to individuals with suitable credit history. We have analyzed each project, ranked them check to value(best to worst i. . 1 to 5), and made a recommendation to accept/reject each one. Project The Barn Rating 1 Recommendation-Accept Construction of this P04 store allows Target to enter a new market. This enthronization offers the greatest return, with an NPV which is 128% of the $13 million investing, and an IRR of 16. 4%. By building this store, Target would be vastly increasing its brand awareness in an landing field that was formerly diligent by its competition.Although the low median income and low percentage of adults with college degrees suggest that the cosmos may not fit the ideal Target guests, the prototype NPV is so far attainable with a fall down in predicted gross sales by 18. 1%. Project Stadium Remodel-Rating-2 Recommendation-Accept The renovation of this successful SuperTarget requires an investiture of $17 million, and provides an NPV of $15. 7 million (92% of investment) and an IRR of 10. 8%. In recent years the ease has begun to deteriorate which, coupled with a decrease in sales has begun to blot Targets brand image.If the status quo is maintained, sales impart decrease until Target is forced to close this facility never allowing them to obtain this large NPV, nor the $0. 4 million in tax benefits of depreciable property write-off. The tall level of median income($65,931) and percentage of adults with college degrees(42%), indicates that this demographic matches Targets ideal customer base, moderating the risk of sales falling short of the predicted amount. By renovating this mending Target is revamping the shopping experience as well as their brand image. This store could be returned to its former glory with a small investment and low level of risk.Project Gopher Place-Rating-3 Recommendation-Accept This construction of a new P04 store in a critical market has an NPV of $16. 8 million, 73% of the initial investment of $2 3 million, and a favorable IRR of 12. 3%. The recent state yield in this area has also attracted the trouble of Wal-Mart, who plans to open 2 new supercenters in this area, giving them control of 76% of the market. If Target does not invest here, Wal-Mart may gain a stranglehold in this area, making it impossible for Target to invest here at a later date.If Target does invest in this project, Wal-Mart may consider opening a second superstore in this area. Furthermore, building this store would attend to increase the Target brand awareness in the area. Although the percentage of college graduates(12%) amongst this population is lower than desired, the high median income(56,400) and large population outgrowth(27%) should drive up sales at Gopher Place. While high cannibalization of sales(19%) from opposite Target stores and sensitivity to decreases in sales give this project a lower ranking, the benefits of the NPV, IRR, and strategic importance make this project acceptable.Pro ject Whalen Court-Rating-4 Recommendation-Accept Construction of this unique store in the center of a major metropolitan area offers an IRR of 9. 8% and an NPV of $25. 9 million. However, these figures do not consider the scale of a project in which the NPV still accounts for 22% of the $119. 3 million investment. Furthermore, the land for this project must be leased, forcing Target to forswear its archetype of purchasing land and forcing the CEC into a quick decision to evacuate than missing this rare opportunity. Heavy foot traffic round this store will provide Target with a vast increase in brand visibility and awareness, allowing them to offset the large initial cost with a decrease in advertising budget. Whalen Court will be the flagship store in this established market area, where there are currently 45 Target stores. The large population, coupled with a median income of $48,500 and exceptionally high percentage of college graduates(45%) indicates a perfect community for Target to enter. Although we recommend the espousal of this project, the vast initial investment makes this project less attractive than its peers.Project Goldies full-blooded-Rating-5 Recommendation-Reject While this SuperTarget was to be built in an area of strategic importance its return is not high enough to guarantee the investment cost. The NPV of $0. 3 million is a meager 1. 26% of the investment cost, and its IRR of 8. 1% is less than the required hurdle rate of 9%. The only reason it maintains a positive NPV is due to predicted credit card sales. 12 Target stores exist in the area, implying a large amount of their sales will be cannibalized from other Target stores.In fact, predicted sales at Goldies Square would have to increase by 62. 5% to cover the redness in sales at the other stores and achieve the prototype NPV. In the short run this investment will add to Targets top line, but in the long run it will get down a burden to the corporation. Although Target has the necessary funds to invest in each of these projects, we recommend they accept all projects other than Goldies Square. The primary goal of the CEC is to choose projects which bring value and growth to the gild while increasing brand awareness and strategic considerations are of alternate importance.This is why the CEC must look past the NPV and IRR and really scrutinize the projects, ensuring resources are allocated to the projects which provide the greatest value to all facets of the corporation. By accepting these iv projects and rejecting Goldies Square Target will achieve sustainable growth and an increase in corporate value. After the recent lackluster returns, stockholders and analysts will be pleased with Targets commitment to positive growth and value creation.