SPRING SEMESTER, 2013
CASE #2 – TARGET CORP
#1: Target’s Capital budgeting system
Target Corporation uses an interesting capital-budgeting system. Projects are proposed using Capital Project Requests (CPRs) and must be approved before money can be spent. The level of approval needed depends on the amount being requested. For projects requiring less than $100K, lower management can approve, but anything above this amount goes to the Capital Expenditure Committee (CEC) which is comprised of 5 executive officers. For projects requiring greater than $50 million, the Board of Directors must approve. The Capital Expenditure Committee meets once a month to approve projects. The committee tries to stay within the capital budget, push for opening 100 stores yearly, and approve projects that keep the company on a growth trajectory. In the monthly meeting, projects are presented by their sponsoring real estate manager, along with data in the form of a dashboard that summaries key metrics of each project. The monthly meeting usually last several hours. We feel that this meeting is not the best use of time for executive officers. To help allow for better use of time we suggest that the approval cut-off for projects be raised from $100K to something closer to $1million. This should help lower the number of projects discussed and in turn shorten the meeting while the proposed projects can be discussed more in depth. The project proposals (CPRs) are owned and presented by the real estate managers. There is a lot of pre-work that goes into the project before it’s presented. Typically 12-24 months of work is done to collect various data such as NPV, IRR, demographics, brand awareness, and sensitivity analysis. The sales projections are provided by the Research and Planning group and all project metrics are summarized into a standardized template, called a dashboard that the committee will reference. We feel that too much time is spent during pre-work by the real estate managers and at the end there is a great deal of sunk cost both financially and emotionally from the time spent gathering information. We suggest that an additional layer of approval be added in the early months of the project pre-work for projects above the $1million threshold. A project update should be presented 3 months into the pre-work and approval would be necessary to continue pursuing the project. This would help keep resources away from bad projects that would have been rejected and might also be used for allocating additional resources to expedite highly attractive projects.
#2: Project analysis:
Our team reviewed all five of the projects based on a series of metrics and developed the below rankings. We decided to approve The Barn, Gopher Place, and the Stadium Remodel. We will recommend the Whalen Court project for approval but the Board of Directors will ultimately make eths decision. We reject the project Goldie’s Square. We have provided a detailed explanation of each decision. We have also provided an overall ranking of the projects. To do this we ranked each project based on the below categories. We then weighted each category to the level of importance we deemed. We assigned the highest weight to NPV because we feel this is the best metric for determining projects. The next highest weights were IRR and Size of project because we feel this metrics help compare the projects to each other. We felt Store Sensitivities was important to gauge risk. The rest of the metrics we felt should be considered, but not with as much importance.
Gopher Place: This project requires an investment of $23 million and has an expected NPV of $16.8 million and 12.3% IRR. This project seemed fairly safe since it is able to meet the prototype NPV even with 5.3% below projected sales. Even a variance of 10% sales...