Target Corporation Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Target Corporation Case Solution

Dud Scovanner, the CFO, has considered the advantages and disadvantages of different capital investment proposals. He conducted the meeting November 14, 2006 with Capital Expenditure Committee (CEC) and other senior executive in order to evaluate its ten capital projects request (CPRs) with $ 200 million in capital expenditure and growth projection of 100 new stores.Out of the ten prospects, five projects have been prioritized named as:

Gopher Place,
Whalen Court,
The Barn,
Golgie’s Square
Stadium Remodel

Each CPR’s dashboards had been providedwhich summarized each project's Net Present value (NPV) and Internal Rate of Return (IRR) with each CPR's location, market size, demographic information and their sensitivity analysis of each CPR's NPV and IRR. The objective of thiscase is to evaluate the project with the growth objectives with respect to economic growth.

The company is planning to open its 100 stores per year with $52.6 billion revenue, 12.1% sales and Capital Expenditure of 6% to 7% of its Revenue. Its main competitors are Costco and Wal-Mart, which compete against Target Corporation with the largest amount of sales and high stores allocation.

1. What is Target’s capital-budgeting process? Is it consistent with the company’s business and financial objectives?

All the businesses invest in projects for increasing shareholders’ wealth and strong growth commitments. The amount of investment in projects is limited, therefore,every company needs to follow a proper capital budgeting process to analyze the return at a certain period.

For capital budgeting process, the most convenient methods that are used are (1) Payback Period (2) NPV and (3) IRR. Target is using Net present value (NPV method and Internal Rate of Return method in its capital budgeting process. These three projections account for the time value of money whichshows how much time it would take to get the return of our investments.

It is reliable for the company to use NPV and IRR method in its capital budgeting process because these give better projection return and estimation of future performance.

The Net Present Value (NPV) decision is favorable in higher positive NPV whichis acceptable to invest in the project. The higher the NPV would result in higher the shareholder value and lower the NPV would result in lower future returns to shareholders. It helps to analyze the profitability of future invested projects.

Another capital budgeting process that Target is using is internal rate of Return (IRR) which results in more complicated and biased decision criteria. It is the rate of return that makes the NPV at zero, and the rule is to selectthe project which has positive NPV or more than zero NPV. The IRR sets the break even rate of return at a certain period. If the IRR is less than the cost of capital, then it would negatively affect the shareholders’ value and if it is greater than the cost of capital then it will increase the shareholders’ value. The calculation of IRR is complicated because it is calculated with the trial and error method.

2. Which of the five CPRs did you accept? Which project attributes did you consider as part of your decision?

The CFO along with CEC had decided to invest in the projects which include (Gopher Place, Whalen Court, The Barn, Golgie’s Square and Stadium Remodel) and five projects are analyzed and evaluated based on the capital budgeting process. These projects consist of four new stores and one modeling store.

The CPRs are accepted or ranked on the basis of effectiveness and feasibility that gives return or profitability on the basis of:

Net Present Value (NPV)
Demographic Factors........... This is just a sample partial case solution. Please place the order on the website to order your own originally done case solution.