Target Corporation Capital Expenditure
Target’s Capital Expenditure Committee, consisting of five top level executives responsible for reviewing all large capital project requests, is currently considering 5 projects to add value to the corporation. Their overall goal is to add 100 stores a year, while maintaining a positive brand image and watching budget constraints. If the CEC rejects a proposal there are large financial and emotional sunk costs, due 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 store operations and credit-card cash flows respectively, due to the different costs of capital. Funding credit card receivables requires less risk than funding store operations because credit cards do not require many fixed assets and are only issued to individuals with suitable credit history. We have analyzed each project, ranked them according to value(best to worst i.e. 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 investment offers the greatest 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 formerly occupied by its competition. Although the low median income and low percentage of adults with college degrees suggest that the population may not fit the ideal Target guests, the prototype NPV is still attainable with a decrease in predicted sales by 18.1%.
Project: “Stadium Remodel”-Rating-#2 Recommendation-Accept The renovation of this successful SuperTarget requires an investment of $17 million, and...
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