Target Corporation Capital Expenditure Committee in Modern Essay

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Target Corporation Capital Expenditure Committee

In modern corporations, various projects compete for the same source of capital allocated for new investments. In preparing an analysis for a Capital Expenditure Committee, the two most important predictive financial metrics used are Net Present Value (NPV) and Internal Rate of Return (IRR). NPV is the present value of the project's cash inflows minus the present value of the project's cash outflows. It indicates the expected impact of the project on the value of the firm. A positive NPV increases the value of the firm. When comparing among mutually exclusive projects, the highest NPV is key in decision making. The IRR is that discount or interest rate which will cause the present value of all future cash flows to equal the incremental investment. In other words, it's the discount rate at which the NPV of a project eventually equals zero. All projects with an IRR greater than the cost of capital should be accepted. When comparing projects, the highest IRR is most attractive. It is critical for any CEC to understand how to utilize these metrics. NPV is typically better when comparing mutually exclusive project alternatives. It implicitly assumes that the project's cash flows can be reinvested at the firm's cost of capital. This is probably a more realistic assumption. The IRR metric implicitly assumes that the cash flows can be reinvested at the project's IRR. In short, any corporation must make critical decisions regarding how to invest its resources. Through a proper understanding of predictive business metrics, various potential investment decisions can be thoroughly analyzed and the best predicted outcome can be realized for the interests of the corporation.

Gopher Place:

Brief Statement: This location is a $23 million investment in a growing, highly favorable market of 70,000 people which has grown 27% in the last five years. Target is currently highly present in the trade area with a 5 store density. Furthermore, Wal-Mart is planning on moving into the market with plans to build two supercenters in the next few years. Based on predications, the predicted value of this investment is worth the cost, despite other factors such as negative impact on other Target stores and encroachment of competitors.

Key Facts: Investment - $23 million; Base NPV -- 16.8 million; IRR -- 12.3%; 19% of sales are forecasted to come from existing Target stores; NPV achievable w / sales 5.3% below R&

Identification of Possible Alternatives and Analysis -- It is critical that other alternatives be explored in considering the predictive performance of Gopher Place and its effect on our surrounding stores: 1) As the IRR of the store is encouraging at 12.3%, steps should be taken to mitigate the effect the store would have on other Target stores possibly through consolidation or investment in a Target Supercenter; 2) To mitigate competitor encroachment steps should be taken to strengthen market presence before Wall-Mart establishes its presence a year or two after us; 3) The most exposed area of the project according to the predications is potential overrun of construction costs. Efforts should be mitigated this risk to ensure project profitability.

Recommendation of Best Alternative -- I would recommend that as Target has a high market density in Gopher Place, 19% of sales will come from existing stores and that we will be competing with larger Wall-Mart super centers in the near future, that consolidation of existing Target resources into the Gopher Place project should be considered to establish a supercenter. This decision will create new market presence that will sell items not offered by existing stores and shield Target by establishing market presence before Wall-Mart super center competition arrives in one or two years.

Reflection on Broader Implication -- This analysis has larger implications as it forces management to examine their investment in light of changing market conditions. Gopher Place is a locale in transition with significant population expansion and change and new stores coming into the city over the next few years. By analyzing both the predicted value of the project as well as it its impact on existing stores, management can look at the health of Target in a larger sense rather than thinking of only one store. Also, by taking into account the impact of Wall-Mart's presence will have on the project, management can consider how best to alter their strategy. The idea of creating a Target Supercenter is key as it will decrease strain on existing stores as it will offer unique product lines, thereby ensuring novel customers rather than drawing from other stores, as well as establish a Target brand in the market before Wall-Mart, thereby making the town less conducive to our competitor's presence when they arrive. Analyses of this sort are critical to ensuring the long-term health of an investment.

Whalen Court:

Brief Statement: This location is a $119 million investment to build a unique single level store in an metropolitan setting of 600,000 people which has grown 3% in the last five years. Target is currently highly present in the trade area with a 45 store density. Furthermore, the project would be leased rather than owned as per typical procedure. The motivation for entering this project is based on brand visibility and achievable sales NPV despite high market density. If we do not go forward with the project at this time competitors will surely move to seize the opportunity.

Key Facts: Investment - $119 million; Base NPV -- 25.9 million; IRR -- 9.8%; 45 stores currently exist in the market; NPV can be achieved with sales 1.9% over R&P; high visibility.

Identification of Possible Alternatives and Analysis -- The critical decision here must be made in regards to the value of the advertising exposure that this significant investment will provide. At over $100 million ($87 lease/$29 renovations) this store is a significant departure from our usual resource allocation in the name of intangible gains based on advertising potential, brand recognition and blocking our competitors from taking over the sight in the following months. Three alternatives exist: 1) Going through with acquiring and investing in the location due to its achievable 1.9% sales over projected NPV, taking advantage of its free advertising potential and ensuring that competitors do not reap these positives in the next few months in a highly sought after location; 2) Passing on the location due to its steep investment price tag of over $100 million, our high market presence of 45 stores, minimal maturity yield and unquantifiable advertising exposure benefit; or 3) Acquiring the lease without investing in the renovations/construction costs. This tactic will establish our brand presence while minimizing our exposure; however it is unclear how this will influence profits or customer estimation of the store's brand value.

Recommendation of Best Alternative: The best course of action is to go through with detailed in alternative #1. Though there are areas of concern with this project the potential upside is tremendous in free advertising and brand name recognition along with a realistic sales over NPV.

Reflection on Broader Implication: The larger value of this project is reflected in its intangibles, such as advertising exposure and name brand recognition. By establishing a flagship store in a highly visible area we will be ensuring that consumers will not only utilize the Whalen Court store but will also consider Target stores when in other locations. This will have a positive impact on our entire line of stores and encourage customer-brand identification through the concept of "first-mover advantage." Also, to look on the other side, our presence will stop our competitors from taking over a high visibility location with an achievable NPV vs. projections.

The Barn:

Brief Statement: This location is a $13 million investment in a growing, highly favorable market of 151,000 people which has grown 3% in the last five years. Target is currently not represented at all in the regional market with two stores 80 and 90 miles away respectively. The project has been delayed due to difficulties with the developer, however as NPV can be achieved with sales 18% below R&P this is an extremely attractive opportunity to get a secure return on investment with even significantly lower sales figures than projected.

Key Facts: Investment: $13 million; Base NPV -- 20.5 million; IRR -- 16.4%; NPV achievable w / sales 18% below R&P. No Target stores in regional market. Significant competitor presence.

Identification of Possible Alternatives and Analysis: Three main alternatives exist for this project: 1) This project can be developed as planned in light of secure return on investment, minimal investment cost when compared to other markets and the opportunity posed for Target to move into a new market; 2) In light of small overall profit, high competitor presence and existing difficulties with the developer, this project can be passed on to focus on higher earning projects in other markets; or 3) As this is generally a small investment project, Target can consider investing more into this market to distinguish itself from the existing competition. This market is large at…[continue]

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