Target Case

stain Corporation Capital Expenditure cig arttes Capital Expenditure Committee, consisting of five top level executives responsible for reviewing every(prenominal) large capital depict requests, is currently considering 5 projects to add think of to the corporation. Their overall goal is to add 100 instals a year, while maintaining a decreed brand image and watching budget constraints. If the CEC rejects a scheme t here are large financial and emotional sunk constitutes, overdue to the long development process.Each project is evaluated in terms of its quantitative, qualitative, and strategic parameters. In calculating the NPV of these projects, Target uses two hurdle rates, 9% and 4% for the workshop operations and identification- fare cash flows respectively, due to the different costs of capital. Funding computer address card receivables requires less risk than funding store operations because credit cards do non require many fixed assets and are only issued to indi viduals with suitable credit history. We have analyzed each project, be them according to value(best to worst i. . 1 to 5), and made a adviseation to seize/reject each one. Project The Barn Rating 1 Recommendation-Accept formulation of this P04 store allows Target to enter a new market place. This identifyment offers the superlative return, with an NPV which is 128% of the $13 million investment, and an IRR of 16. 4%. By building this store, Target would be vastly increasing its brand awareness in an area that was in one case occupied by its competition.Although the low median income and low destiny of adults with college degrees point that the population whitethorn not fit the exaltation Target guests, the type NPV is still attainable with a decrease in predicted gross revenue by 18. 1%. Project Stadium Remodel-Rating-2 Recommendation-Accept The renovation of this roaring SuperTarget requires an investment of $17 million, and provides an NPV of $15. 7 million(92% of i nvestment) and an IRR of 10. 8%. In recent old age the facility has begun to deteriorate which, coupled with a decrease in sales has begun to tarnish Targets brand image.If the status quo is maintained, sales pull up stakes decrease until Target is forced to close this facility never allowing them to achieve this large NPV, nor the $0. 4 million in tax benefits of depreciable property write-off. The utmost up 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 summation. By renovating this location Target is revamping the shopping experience as well as their brand image. This store could be returned to its former glory with a piffling investment and low level of risk.Project Gopher Place-Rating-3 Recommendation-Accept This aspect of a new P04 store in a critical market has an NPV of $16. 8 million, 73% of the initial investment of $23 million, and a affectionate IRR of 12. 3%. The recent population harvest-tide in this area has also attracted the attention of Wal-Mart, who plans to open 2 new supercenters in this area, giving them lock 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 reconsider opening a second superstore in this area. Furthermore, building this store would help attach 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 growth(27%) should trend up sales at Gopher Place. While high cannibalization of sales(19%) from other 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 pro ject acceptable.Project Whalen coquet-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 only accounts for 22% of the $119. 3 million investment. Furthermore, the land for this project must be leased, forcing Target to forego its archetype of purchasing land and forcing the CEC into a quick close to avoid than missing this rare opportunity. Heavy foot traffic orbitual this store result 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 perfec t community for Target to enter. Although we recommend the acceptance of this project, the vast initial investment makes this project less agreeable than its peers.Project Goldies Square-Rating-5 Recommendation-Reject While this SuperTarget was to be built in an area of strategic importance its return is not high plenteous to justify 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 subdue the loss in sales at the other stores and achieve the ideal NPV. In the short run this investment will add to Targets top line, but in the long run it will become 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 company while increasing brand awareness and strategic considerations are of secondary importance.This is why the CEC must look past the NPV and IRR and really visit the projects, ensuring resources are allocated to the projects which provide the greatest value to all facets of the corporation. By evaluate these four projects and rejecting Goldies Square Target will achieve sustainable growth and an increase in corporate value. After the recent lusterless returns, stockholders and analysts will be pleased with Targets commitment to positive growth and value creation.