Target Capital Budget

Target Capital Budget- Target CB 8

1. Describe and critique Target’s capital-budgeting system. Give special consideration to the role of the real-estate managers and the makeup of the CEC.

Target’s capital budgeting system is a vertical, hierarchal structure in nature. Real-estate managers submit expenditure requests after their project development efforts and once these requests are submitted, they are put in front of Target’s top executives for the final decision making. This only involves projects over $100,000, and if it requires a capital outlay of >$50 million, the Board of Directors must approve.  This puts too much decision making in the hand of executives that are not involved enough to the day to day operations to be able to make good decisions regarding these projects and may create a bias with the real-estate managers in their calculated projections due to the time and money spent in the development stage of the projects.

 The NPV test is the key test that the CEC uses to determine whether to go through with a project, and if it comes out negative, its Economic Value Added to Target is the next thing that is looked at.  In the grand scheme of things, the NPV test is a good metric to go by as it screens out CPRs quickly and efficiently, however, it may allow for some CPRs with slightly negative NPVs to get denied when in reality, these CPRs may have potential to benefit target in other areas (brand awareness/market share, etc.).  

2. Which of the five CPRs should Doug Scovanner accept? Be prepared to explain how each of the considerations that follow influenced your decision:

1. NPV and IRR
2. Size of the project
3. Cannibalization of other stores’ sales
4. Store sensitivities
5. Variance of prototype
6. Customer demographics
7. Brand-awareness impact

Gopher Place

Whalen Court- Ryan

        Based on the below analysis, REJECT (but close)

1. The NPV of the Whalen Court store is lower than the model store and the project’s IRR is less than the target of 13% and exceeds the 9% discount rate by a small margin.  The weight of credit sales is heavy for this store as credit sales double the 4% discount rate.  
2. The size of Whalen Court ($114MM) is an issue as the project makes up greater than half of the proposed CAPEX that the CEC is reviewing and they should be looking for a much greater NPV given the size of the project.
3. With there being 45 other stores in the market, Whalen Court could potentially cannibalize the other stores’ sales but with the lack of market data regarding this issue, it makes it hard to make a sound judgement.  
4. This CPR would need a 1.9% increase in sales to reach the target NPV and 31% increase in sales to reach IRR target.  There is not much they can do to reduce costs of building either as the property in this area is valuable enough for other companies to pay the steep construction costs
5. The variance of prototype for this CPR is an issue as it is $15,128 off from the prototype.  Another issue is that Target will never own this property as it will be leased, so the property will never be of value to the CEC in their analysis.
6. The population growth is positive but it is the slowest among the other CPRs, sitting at 3% with a median income at a solid $47,500, but not great compared to other projects.
7. Brand Awareness- This would be great for brand awareness being in the middle of the urban center, but the time frame for this impact to hit is the real question.

The Barn- ACCEPT

1. With NPV of $20,500, it is higher than the prototype and it is better in BOTH credit and the store areas.  IRR is also greater than the prototype by 3.4% and both the store and credit areas are exceeding their discount rates.
2. Smallest CAPEX of the 5 projects with the highest population density
3. Very little (closest store is 80 miles away)
4. Good outlook regarding sensativities as the sales could decline 18% and they would still reach the PO4 NPV levels.  Construction costs can also increase a drastic amount before it became an issue.  The only concern regarding sales declination would be Walmart undercutting their prices as they are known to do.
5. Variance for the Barn CPR is only $378 off from prototype, the best of any other project, with land and real estate being cheaper than prototype.  
6. Market population is an issue as it is a rural area with a 3% growth and low median income and lowest % of population with college degree.
7. Being a new store to a rural area, brand awareness would be good as it is a completely new market for Target.