Management MODULE M6
Financial Management of Corporate Projects and
Case: TARGET CORPORATION
1. Executive Summary
Target corporation has a growth strategy of opening 100 new stores per year. Doug Scovanner, the CFO of Target Corporation is preparing for the November meeting of the Capital Expenditure Committee (CEC). He is one of the executive officers who are members of the CEC. 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.
2. 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....