With the fiscal year’s end approaching in January, there was a need to determine which projects best fit Target’s future store growth and capital expenditure plans, with the knowledge that those plans would be shared with both the board and the investment community. Target has a growth strategy of opening approximately 100 new stores a year. CEC referred projects with an investment larger than $50 million to the board of directors for approval. The five CPRs that Scovanner would present to the board are: Gopher Place, Whalen Court, The Barn, Goldie’s Square and Stadium Remodel.
Recommendations to the Capital Expenditure Committee The capital expenditure committee should accept all the proposals before it. This will be based on the factors as detailed on part three of this document. The NPV’s of all these projects are positive, a positive NPV contributes favorable to the share price or share value. The Internal Rate of Return of these entire projects are below the prototype store IRR which is a benchmark project. The IRR is an alternative to NPV however if the NPV is positive and the IRR is not what is desired, the NPV may supersede in making an investment decision.
The IRR is what is expected based on internal factors. Projects with a low IRR may be funded through debt capital if cost of debt is below the project IRR/ rate of return. An overarching objective of Target Corporation is to meet the corporate goal of adding 100 new stores a year while maintaining a positive brand image. Since all of these shops have a positive NPV and in the long run they all make good earnings before interest and taxes. The CEC must accept them because they will achieve the goal of market capitalization and brand visibility.
The Stadium remodel is particularly important because the store has deteriorating and dilapidating facilities that would defeat the purpose of a positive brand image. The store must be remodeled before it starts affecting the sales of other Target stores with bad publicity. Whalen Court is to be open in a metropolitan area and it is an urban center. The population of this trade area is very big and has a good income median. The project requires a lot of capital investment; however it presents Target stores with a unique contribution in that it would offer free advertising to the corporation.There are a lot of consumers passing by and Target already spends in excess of $100 million dollars in advertising opening this shop might help reduce these costs.
If funds are a limiting factor, Target should fund the projects in the following other: 1. Gopher Place should be considered first. The project requires a 23 000 000 investment. It has the best NPV and it is above the prototype store NPV. The sales can still decline by more than 5% and it would still be above the prototype store.
It has a better EBTI compared to the other costs, though its present’s risks it offers opportunity as well. . Whalen Court may be the second in line. It has a positive NPV although it is below the prototype store value. If sales improve by 1.
9%, it would be equal to the prototype store NPV. This is a better NPV compared to the remaining two projects. The store provides a good market with a huge population and better income median. 3. Goldie’s Square, the NPV is positive but the sales must still rise by 45.
1% before it can meet the prototype store NPV. The NPV is not as good as can be expected but it is still positive. What makes this a desirable investment is the location that the store will be built in.Project is important because of its strategic location; all the big retailers want to capture this market for visibility and market capitalization. Since this is not a huge investment it may be considered. 4.
Stadium Remodel is paramount that the CEC makes this investment failing that the poor state of the facilities would tarnish the image of the brand. The NPV is positive and EBIT. 2. Problem / decision statement In the Capital Expenditure Approval Process, there is the Capital Expenditure Committee (CEC) which is a team comprising of top executives that meet monthly to review all capital project requests (CPR) in excess of $100 000.
All of the proposals are considered economically attractive and any CPR’s with questionable economics are rejected. Doud Scovanner, the CFO of Target Corporation is preparing for the November meeting of the CEC where he will present five CPRs to the committee of five, which he is a member of. Financial data and all other related data about these projects is available; he now has to compile a report to the committee, convincing them that they make a decision about investing in these projects. The CEC considers several factors to decide whether to accept or reject a proposal.He has to detail his report such that it becomes convincing to the CEC and they must therefore decide to release the money for the CPRs. 3.
Critical or key issues The Capital Expenditure Committee (CEC) is a team comprising of top executives that meet monthly to review all capital project requests (CPR) in excess of $100 000. All of the proposals are considered economically attractive and any CPR’s with questionable economics are rejected. The CEC considers several factors to decide whether to accept or reject a proposal. Critical factors that the CEC considers in evaluating CPRs are: 1.
The overarching objective was the corporate goal of adding about 100 stores a year while maintaining a positive brand image. 2. Projects must provide a suitable Net Present Value (NPV) 3. Projects must provide a suitable Internal Rate of Return (IRR) 4.
Sensitivity of NPV and IRR to sales variation. 5. Projected profits 6. Projected earnings per share 7.
Total investment size 8. Impact on sales of nearby Target stores Net present value it the difference between market value of the investment and its cost (Firer et al 2009:269).
