Q1. Which of the five CPRs should Doug Scovanner accept?
A1.
Gopher Place
The Gopher Place requires an initial investment of $23 million, which is sufficient, considering the return of the project. The NPV of the project is positive at about $16.8 million with an IRR of 12.3%. The positivity of NPV suggests that the project should be accepted as the company can earn a positive return on its investment. The sales contribution of the new store will be almost 81%, which is also a positive sign for the company.
The Gopher place requires two years for completion after which the sales are anticipated to be below by 5.3% from the forecast level. This reduction in sales is due to an increased number of stores in the same region.The brand awareness will not be affected as there are five stores, which are already running in the region.
Therefore, the Gopher Place project should be accepted because of multiple reasons. The first one being the NPV of the project, which is not only positive, however it is 73% of the initial investment. The next factor is the population growth, which is the highest in this region. Target corporation can anticipate a population of almost 89,000 over one year, when the store will open in 2007. Moreover, the median income of the households is the second highest among the five regions at $56400.
Therefore, in terms of long term investment, the Gopher Place is a good opportunity for the company, considering the future aspects of the region.
Whalen Court
The Whalen Court store is a risky opportunity for the company. The company is already operating 45 stores in the market, therefore, there will be no significant impact on the brand awareness of the company. The Whalen Court will provide an opportunity for the company to enter the urban metropolitan area of the market, due to which, the company is anticipating an additional 1.9% of the sales above the forecast sales. Moreover, this store will reduce the advertising cost of the company which, if adjusted against the initial investment, will reduce the investment to $19.3 million. The company will have to bear an additional cost for the lease rentals as this project will be leased by the company.
The NPV of the company is $25900 with an IRR of 9.8%.This factor adds to the acceptance of the project.The variance to prototype for the lease will reduce the NPV to negative $78,912 which is a negative sign for the company. The anticipated population by 2008 will be 670,000, which will also increase the sales of the store.
Therefore, based on these factors, it is suggested to the company not to invest in the Whalen Court store. The reason is mainly the loss in monetary terms and the existing significant presence of the company in the market.
The Barn
The Barn provides a lucrative investment for the Target Corporation. The reason is that there is no existing store of Target in this region. Therefore, it is a clear opportunity for the company to enter a new market. The NPV of the store is positive at about $20.5 million with an IRR of 16.4%. The high NPV shows that the company will be able to earn a significant amount in terms of profit after covering their initial investment. The anticipated population at the time of opening of the store will be 156,000. This will result in the increase in the sales of the company.
The project requires an initial investment of $13 million, which is almost a negligible amount as compared to the returns, which the company can earn.The Barn will play an important role in creating the brand awareness of the Target. The reason is that the company does not have any stores in the area. The nearest is also 80 to 90 miles away. Therefore, the company will be able to create its presence in the market, where it does not exist, currently.
The median income in the area is the lowest because of being a rural region and therefore, it will be a suitable investment for the company as the Target stores are the discount stores providing products at a lower and discount price. Therefore, by considering the projects, the company should initiate and invest in the Barn store mainly because of creating a presence in the area..............................
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