Target Corp Case Analysis

Topics: Net present value, Investment, Internal rate of return Pages: 5 (1810 words) Published: March 15, 2011
| Target Corporation|
To:Dr. Brian Boscaljon
From:Adam Leone and Jean Costa
CC:Doug Scovanner, CFO
Date: [ 2/14/2011 ]
Re:November Meeting Capital Budgeting Decisions
The Objective
As the November Meeting approaches, CFO Doug Scovanner is faced with the problem of choosing which of the five controversial projects available to accept. Our task is to assume this role and evaluate each of the projects based upon two major criteria. The first is determining the firm’s financial motives by quantifying the projected value added to the firm and the risk associated with each project. When determining to accept or reject projects based upon adding value, the most helpful instruments we have are Net Present Value (NPV) and the Internal Rate of Return (IRR). As we consider capital constraint problems, we also use the Profitability Index in order to determine which projects add the most value per dollar spent. Some key drivers behind this decision criterion include projected sales figures, speculated variations in these sales projections, and the impact that adding a new store into the trade area has on the sales of surrounding stores. The second criterion involved in analyzing the projects is determining the firm’s business motives. This deals with recognizing Target’s corporate goals and mission and how they accomplish this through their business strategy. Two of the greatest aspects of their strategy are a high value on brand awareness and a defined target market of college educated women with a family. The ultimate goal, therefore, is finding a healthy balance between these two criteria by integrating as much of Target’s business strategy into the fundamental financial goals of wealth maximization shared by all firms. Analysis

It has already been established that the vast majority of projects that make it to this stage of the analysis have been considered to be profitable endeavors. Therefore, the main goal from this point forward is to consider how much of a sacrifice we’re willing to make from our financial goals in order to establish Target’s optimal position strategically. This not only considers the potential sales figures, but also the impact the arrival of a new store would have on competition, both friendly (other Target stores), and rival (Wal-Mart). Based upon the NPV of the base case scenario of all the projects, we would accept them all, but with differing levels of confidence in their potential value. Therefore, with the current capital budget, we decided to rank and evaluate them in order of the projects with the least evidence supporting the investment to most. As a guideline to our rankings, we used an average of their rankings in several various categories in order to weigh both the financial objectives and business specific objectives. Goldie’s Square – Ranked 5th

Goldie’s Square has been established as a hot spot as far as strategic location is concerned; however, the financial requirements must take precedence over establishing the brand in this case. Referring to our Evaluation Sheet, Goldie’s ranks last in every profitability method and scenario. In addition to its low NPV, it is also the only project that would yield a negative NPV in response to a 10% decrease in sales. Furthermore, the existing forecasted sales alone wouldn’t even be enough to sustain a guaranteed competitive existence in the market. This is supported by a negative NPV of cash flows generated by the store alone. If the credit sales are overstated, even the base case NPV could be a negative value, thus making the investment even more risky. Of the five potential investments, this is the only one we would actually reject flat out whether budget constraints were an issue or not. Therefore, we also would strongly recommend against funding this project with additional debt or equity as well. Gopher Place – Ranked 4th

Gopher Place is the smallest trade area of the investment sites, but it is also the fastest growing. If we...
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