Cranefield College of Project and Programme Management MODULE M6 Financial Management of Corporate Projects and Programmes Case: TARGET CORPORATION 1. Executive Summary Target corporation has a growth strategy of opening 100 new stores per year. Doug Scovanner, the CFO of Target Corporation is preparing for the November meeting of the Capital Expenditure Committee (CEC). He is one of the executive officers who are members of the CEC.

With the fiscal year’s end approaching in January, there was a need to determine which projects best fit Target’s future store growth and capital expenditure plans, with the knowledge that those plans would be shared with both the board and the investment community. Target has a growth strategy of opening approximately 100 new stores a year. CEC referred projects with an investment larger than $50 million to the board of directors for approval. The five CPRs that Scovanner would present to the board are: Gopher Place, Whalen Court, The Barn, Goldie’s Square and Stadium Remodel.

Recommendations to the Capital Expenditure Committee The capital expenditure committee should accept all the proposals before it. This will be based on the factors as detailed on part three of this document. The NPV’s of all these projects are positive, a positive NPV contributes favorable to the share price or share value. The Internal Rate of Return of these entire projects are below the prototype store IRR which is a benchmark project. The IRR is an alternative to NPV however if the NPV is positive and the IRR is not what is desired, the NPV may supersede in making an investment decision.

The IRR is what is expected based on internal factors. Projects with a low IRR may be funded through debt capital if cost of debt is below the project IRR/ rate of return. An overarching objective of Target Corporation is to meet the corporate goal of adding 100 new stores a year while maintaining a positive brand image. Since all of these shops have a positive NPV and in the long run they all make good earnings before interest and taxes. The CEC must accept them because they will achieve the goal of market capitalization and brand visibility.

The Stadium remodel is particularly important because the store has deteriorating and dilapidating facilities that would defeat the purpose of a positive brand image. The store must be remodeled before it starts affecting the sales of other Target stores with bad publicity. Whalen Court is to be open in a metropolitan area and it is an urban center. The population of this trade area is very big and has a good income median. The project requires a lot of capital investment; however it presents Target stores with a unique contribution in that it would offer free advertising to the corporation.

There are a lot of consumers passing by and Target already spends in excess of $100 million dollars in advertising opening this shop might help reduce these costs. If funds are a limiting factor, Target should fund the projects in the following other: 1. Gopher Place should be considered first. The project requires a 23 000 000 investment. It has the best NPV and it is above the prototype store NPV. The sales can still decline by more than 5% and it would still be above the prototype store. It has a better EBTI compared to the other costs, though its present’s risks it offers opportunity as well. . Whalen Court may be the second in line. It has a positive NPV although it is below the prototype store value. If sales improve by 1. 9%, it would be equal to the prototype store NPV. This is a better NPV compared to the remaining two projects. The store provides a good market with a huge population and better income median. 3. Goldie’s Square, the NPV is positive but the sales must still rise by 45. 1% before it can meet the prototype store NPV. The NPV is not as good as can be expected but it is still positive. What makes this a desirable investment is the location that the store will be built in.

Project is important because of its strategic location; all the big retailers want to capture this market for visibility and market capitalization. Since this is not a huge investment it may be considered. 4. Stadium Remodel is paramount that the CEC makes this investment failing that the poor state of the facilities would tarnish the image of the brand. The NPV is positive and EBIT. 2. Problem / decision statement In the Capital Expenditure Approval Process, there is the Capital Expenditure Committee (CEC) which is a team comprising of top executives that meet monthly to review all capital project requests (CPR) in excess of $100 000.

All of the proposals are considered economically attractive and any CPR’s with questionable economics are rejected. Doud Scovanner, the CFO of Target Corporation is preparing for the November meeting of the CEC where he will present five CPRs to the committee of five, which he is a member of. Financial data and all other related data about these projects is available; he now has to compile a report to the committee, convincing them that they make a decision about investing in these projects. The CEC considers several factors to decide whether to accept or reject a proposal.

He has to detail his report such that it becomes convincing to the CEC and they must therefore decide to release the money for the CPRs. 3. Critical or key issues The Capital Expenditure Committee (CEC) is a team comprising of top executives that meet monthly to review all capital project requests (CPR) in excess of $100 000. All of the proposals are considered economically attractive and any CPR’s with questionable economics are rejected. The CEC considers several factors to decide whether to accept or reject a proposal. Critical factors that the CEC considers in evaluating CPRs are: 1.

The overarching objective was the corporate goal of adding about 100 stores a year while maintaining a positive brand image. 2. Projects must provide a suitable Net Present Value (NPV) 3. Projects must provide a suitable Internal Rate of Return (IRR) 4. Sensitivity of NPV and IRR to sales variation. 5. Projected profits 6. Projected earnings per share 7. Total investment size 8. Impact on sales of nearby Target stores Net present value it the difference between market value of the investment and its cost (Firer et al 2009:269).

The rule for net present value is that the investment with more positive present value must be taken in the expense of the one with negative or lower positive present value. Advantages of net present value ? The introduction of time value of money ? It expresses all future cash flows in today’s value, which enables direct comparisons ? It allows for inflation and escalations ? It looks at the whole project from the start to finish ? It can stimulate project what if analysis using different values ? It gives more accurate profit or loss forecast Gopher place| Whalen court| The barn| Goldie’s square| Stadium remodel| Accumulated present value| 39800| 145200| 33500| 24200| 32700| Less initial investment| (23000)| (119300)| (13000)| (23900)| (17000)| Net present value| 16800| 25900| 20500| 300| 15700| Internal rate of return It is value of discount factor when the net present value is equal to zero (Firer et al 2009:280). The rule of internal rate of return is that the project with the higher rate of return must be accepted because its gives the clear indication that the project will succeed Advantages of Internal rate of return It is not complicated to understand and communicate Disadvantages of Internal rate of return ? This method may results in multiple answers or not deal with non conventional cash flow ? May lead to incorrect decision in comparison with mutually exclusive investment ? Another problem with IRR comes about when cash flow are not conventional Graph showing the internal rate of return of 5 possible project * Gopher place 12. 3% * Whalen court 9. 8% * The barn 16. 4% * Goldie’s square 8. 1% * Stadium remodel 10. 8% Projected profits and earnings per share

Target corporation uses projected profit as one its criteria to accept or reject the project, the entities sales had increased a lot from the previous years so the company project the project of the of new project by taking into account the existing stores profits. Earnings per share of target corporation for financial year ending January 2006 is $2. 73 per share according to exhibit2 which is computed by taking current year total comprehensive income and dividing it by the number of ordinary shares of the company.

Target corporations earning per share is greater than earning per share of its bigger competitor Waal mart and this shows that the company is really doing well in the market and it possess powers to expand its dominance in the market by introducing new stores each year 4. Analysis from a strategic, qualitative and quantitative perspective Gopher Place: P04; Store NPV: $16 800 000 HURDLE ADJUSTMENT (CPR Dashboard)| Sales| NPV| Sales could decrease by (5. 3%) and still achieve Prototype Store NPV | IRR| Sales would have to increase by 2. 2% to achieve Prototype Store NPV| | |

Gross Margin| NPV| Gross Margin could decrease by (0. 72) pp and still achieve Prototype Store NPV | IRR| Gross Margin would have to increase by 0. 29 pp to achieve Prototype Store NPV| | | Construction (Building & Site work)| NPV| Construction costs could increase by $3,102 and still achieve the Prototype Store NPV| IRR| Construction costs would have to decrease by ($751) to achieve Prototype Store IRR| | | Full Transfer Impact| NPV| Sales would have to increase by 2. 3% to achieve Prototype Store NPV| IRR| Sales would have to increase by 9. % to achieve Prototype Store IRR| RISK/OPPORTUNITY| 10% Sales Decline| NPV| If sales declined by 10% Store NPV would decline by($4,722) | IRR| If sales declined by 10% Store IRR would decline by (1. 3)pp| | | 1 pp GM Decline| NPV| If gross margin decreased by 1 pp, Store NPV would decline by ($3,481)| IRR| If gross margin decreased by 1 pp, Store IRR would decline by (0. 9) pp. | | | 10% Construction cost increase| NPV| If construction cost increased by 10% Store NPV would decline by ($1,494)| IRR| If construction cost increased by 10% Store IRR would decline by (0. ) pp. | | | Market Margin, Wage Rate, etc| NPV| If we applied market specific assumptions, Store NPV would decline by ($5,434)| IRR| If we applied market specific assumptions, Store IRR would decline by (1. 5) pp. | | | 10% Sales increase | NPV| If sales increased by 10%, Store NPV would increase by $4,621| IRR| If sales increased by 10%, Store IRR would increase by 1. 2 pp| VARIANCE TO PROTOTYPE| The Gopher Place with a store NPV of $16,800 is $3,038 above the Prototype Store NPV. The following items contributed to the variance. Land| NPV| Land cost contributed a positive $287 to the variance from prototype. | IRR| Land cost contributed a positive 0. 1 pp to the variance prototype. | | | Non-Land Investment| NPV| Building/site work costs contributed a negative ($4,741) to the variance from Prototype. | IRR| Building/site work costs contributed a negative (2. 6) pp to the variance from Prototype. | | | Sales| NPV| Sales contributed a positive $6,331 to the variance from Prototype. | IRR| Sales contributed a positive 1. 9 pp to the variance from Prototype. | | Real Estate Taxes| NPV| Real Estate Taxes contributed a positive $615 to the variance from Prototype. | IRR| Real Estate Taxes contributed a positive 0. 2 pp to the variance from Prototype. | 1. Strategic importance * This is a key market for Target already has five stores in the area. Wal-Mart is expected to add two new supercenters in response to the population growth. In order to curtail Wal-Mart’s market dominance and to ensure that the brand image of Target is maintained in this locality it is imperative that a P04 store is built.

The population in this area is growing at a rate of 27% between the years 2000 – 2005, the median income for the population is $56 400; this store will surely increase market capitalization of Target stores and thereby maintaining a positive brand image which is a strategic goal. 2. Net Present Value HURDLE ADJUSTMENT (CPR Dashboard) * The project is viable with a positive net present value of $16 800 000. A positive NPV value will results in an increase in share value. * Based on this factor the project should be accepted as it will increase share value. The projected sales could decrease by 5. 3% and the NPV of the project will still be achieved. * Even when a gross margin of the project were to decrease by 0. 72 percentage point the project will still yield a positive NPV. * If this project is undertaken it would require that a new (own) shop be erected which will result in cash outflows in a form building and site work, the planned construction cost could still increase by $3,102 000 and the project will maintain a positive NPV. * The transfer sales from other stores in the trading area will have to increase by 2. % to achieve the prototype store NPV. * On the basis of NPV this projected may be accepted. RISK/OPPORTUNITY ANALYSIS * If sales were to decline by 10% the NPV would decrease by $4 722 000 just over 28% of the NPV. * If the gross margin decrease by 1 percentage point the NPV would decrease by $3 481 000 a 20. 72 % decrease of the NPV. * If the construction costs increased by 10% the NPV would decline by $1 494 000, an 8. 89% decrease of the NPV. * If market specifics assumptions on market margins, wages etc are applied the store NPV would decrease by $5 434 000 a 32. 5% on the prototype store NPV. * If sales increased by 10% the NPV would increase by $4 621 000 a 27. 51% increase. * The risks associated with this project are greater but so are the opportunities with a 10% sales increase there would be a 27. 51% increase in the NPV. This project should be accepted the project managers must exercise caution on the costs as the project has an elements of risk. Variance from the plans must be kept at minimum. VARIANCE TO PROTOTYPE * The NPV of this project exceeded the prototype store value by $3 038 000 the following factors contributed to the variance. Land cost contributed a positive $287 to the variance from prototype. * Building/site work costs contributed a negative ($4,741) to the variance from Prototype. * Sales contributed a positive $6,331 to the variance from Prototype. * Real Estate Taxes contributed a positive $615 to the variance from Prototype. * The NPV of this project is acceptable as it exceeds by far the expectation and based on this the project should be accepted. 3. Internal Rate of Return (IRR) HURDLE ADJUSTMENT (CPR Dashboard) * Internal Rate of Return is an important alternative to NPV; the IRR summarizes the merits of the project.

This rate is an internal rate in a sense that it depends only on cash flows of a particular project or investment, not on rates offered elsewhere hence internal rate of return. * The project has an IRR of 12. 3%, this IRR does not meet the prototype store IRR sales must still increase by 2. 2% achieve this. * The gross margin of the project must increase by 0. 29 percentage point in order to achieve the required IRR. * The cash outflow related to the construction costs must still decrease by $751 000 in order to achieve the required IRR. * Transfer sales must increase by 9. % to achieve desired IRR. RISK/OPPORTUNITY ANALYSIS * If sales declined by 10% Store IRR would decline by (1. 3) percentage point, IRR is already below the prototype store value. * If gross margin decreased by 1 percentage point, Store IRR would decline by (0. 9) percentage point, which is an almost equal decline. * If construction cost increased by 10% Store IRR would decline by (0. 6) percentage point, this decline in IRR is far less than the increase in costs. * If sales increased by 10%, Store IRR would increase by 1. 2 percentage point, this is a positive indication. based on the IRR figures this is not a very risky venture if sales decline by 10% IRR decline by 1. 3 percentage point but when sale increase by 10% IRR only increase by 1. 2 percentage point. VARIANCE TO PROTOTYPE * Land cost contributed a positive 0. 1 percentage point to the variance prototype. * Building/site work costs contributed a negative (2. 6) percentage point to the variance from Prototype. * Sales contributed a positive 1. 9 percentage point to the variance from Prototype. * Real Estate Taxes contributed a positive 0. 2 percentage point to the variance from Prototype. The projects IRR is better when compared to the prototype store except for real estate tax which contributed a low 0. 2 percentage point. 4. Projected profits The profit and loss summary suggests that the project will make a projected loss of ($567 000) in the first year of opening the store compared to the prototype store value of ($97 000). By the fifth year the store will be making Earnings before Interest and Tax (EBIT) of $4 452 000 a year $ 886 000 above the prototype store value. This projected should be accepted on the basis of the profits it will make as this will increase the share value. 5.

Projected earnings per share Earnings per share are affected by both the NPV and the earnings/profits of the project/investment. This investment/project has a positive NPV and earnings in the long run which will results in increased earnings per share. 6. Investment required This store requires an investment of $23 000 000 and was scheduled to open in October 2007. This is a sizable investment. The NPV is positive; the population is growing at 27%. The income median of the population is $56 400. The returns on this investment would payback this amount far soon than can be anticipated. 7. Impact on sales of nearby Target stores

There is a high density of Target stores in the trade area and nearly 19% of the sales included in the forecasts were expected to come from existing targets stores. This will not be good for the business generally however the 81% of forecasted sales will either come from new market growth or from completion. Conclusion * This project should be accepted by the CEC based on the above criterion. The project presents a lot of risks and opportunities to Target stores. The opportunities far outweigh the risks, positive higher NPV, increase EBIT, additional store to meet target and increase brand image.

The project can still be accepted with the IRR figures although they are below a prototype store value. The IRR is based on an internal value, if for an example the projected may be funded by borrowed funds and the debt cost are below the IRR it would be a perfectly acceptable investment. As long as the project has a positive NPV this will increase the share value. Whalen Court: Unique Single Level; Store NPV: $14,225 HURDLE ADJUSTMENT (CPR Dashboard)| Sales| NPV| Sales would have to increase by 1. 9% to achieve Prototype Store NPV | IRR| Sales would have to increase by 31. % to achieve Prototype Store NPV| | | Gross Margin| NPV| Gross Margin would have to increase by 0. 28 pp to achieve Prototype Store NPV | IRR| Gross Margin would have to increase by 4. 58 pp to achieve Prototype Store NPV| | | Construction (Building & Sitework)| NPV| Construction costs would have to decrease by ($4,289) to achieve the Prototype Store NPV| IRR| Construction costs would have to decrease by ($41,070) to achieve Prototype Store IRR| | | Full Transfer Impact| NPV| Sales would have to increase by 7. 7% to achieve Prototype Store NPV| IRR| Sales would have to increase by 36. % to achieve Prototype Store IRR| RISK/OPPORTUNITY| 10% Sales Decline| NPV| If sales declined by 10% Store NPV would decline by ($16,611) | IRR| If sales declined by 10% Store IRR would decline by (1. 0)pp| | | 1 pp GM Decline| NPV| If margin decreased by 1 pp, Store NPV would decline by ($11,494)| IRR| If margin decreased by 1 pp, Store IRR would decline by (0. 7) pp. | | | 10% Construction cost increase| NPV| If construction cost increased by 10% Store NPV would decline by ($2,178)| IRR| If construction cost increased by 10% Store IRR would decline by (0. 1) pp. | | | Market Margin, Wage Rate, etc|

NPV| If we applied market specific assumptions, Store NPV would decline by ($16,877)| IRR| If we applied market specific assumptions, Store IRR would decline by (1. 1) pp. | | | 10% Sales increase | NPV| If sales increased by 10%, Store NPV would increase by $16,647| IRR| If sales increased by 10%, Store IRR would increase by 1. 0 pp| VARIANCE TO PROTOTYPE| The Whalen Court with a store NPV of $14,225 is $3,174 below the Prototype Store NPV. The following items contributed to the variance. | Lease| NPV| Lease cost contributed a negative ($78,912) to the variance from prototype. | IRR| Lease cost contributed a negative (15. ) pp to the variance prototype. | | | Non-Land Investment| NPV| Building/sitework costs contributed a negative ($10,168) to the variance from Prototype. | IRR| Building/sitework costs contributed a negative (7. 9) pp to the variance from Prototype. | | | Sales| NPV| Sales contributed a positive $99,963 to the variance from Prototype. | IRR| Sales contributed a positive 22. 9 pp to the variance from Prototype. | | | Real Estate Taxes| NPV| Real Estate Taxes contributed a negative ($637) to the variance from Prototype. | IRR| Real Estate Taxes contributed a negative (0. 2) pp to the variance from Prototype. | . Strategic importance * This is a unique single-level store. Target already has forty five stores in this trade area. The Whalen Court market represents a rare opportunity for Target to enter an urban center of a major metropolitan area. Unlike other areas, this opportunity provided Target with major brand visibility and essentially free advertising for all passersby. The population of this area is significantly high and the median income for the population is $48 500; this store will surely increase market capitalization of Target stores and thereby maintaining a positive brand image which is a strategic goal.

The investment costs will be balanced by the huge adverting costs that Target will save on annually if this project is undertaken. 2. Net Present Value HURDLE ADJUSTMENT (CPR Dashboard) * The project is viable with a positive net present value of $25 900 000 . A positive NPV value will results in an increase in share value. * Based on this factor the project should be accepted as it will increase share value. * The project is risky as the projected sales must still increase by 1. 9% and gross margin improve by 0. 28 percentage point before it can achieve the prototype store NPV. The cash outflows must decline by $4 289 and transfer sales from other stores in the trading area will have to increase by 2. 3% before the prototype store NPV can be achieved. * The NPV is positive that is acceptable however the projected NPV is below the prototype store which is factor to be considered in order to evaluate the project. RISK/OPPORTUNITY ANALYSIS * If projected sales declined by 10% the NPV would decrease by $16 611 000 (64. 14% decline) of the NPV and If gross margin decrease by 1 percentage point the NPV would decrease by $11 494 000 (44. 38%) decline in NPV. Should construction costs increased by 10% the NPV would decline by $2 178 000 (8. 41%) decrease of the NPV and if market specifics assumptions on market margins, wages etc are applied the store NPV would decrease by $16 877 000 (65. 16%) of the prototype store NPV. * If sales increased by 10% the NPV would increase by $16 647 000 (64. 27%) increase in the NPV. * This is a very risky investment if the CEC accept this project they must put a lot of measures to mitigate the risk. It can also be beneficial if sales cost increase, the NPV figures aren’t that positive due to the risk factors.

VARIANCE TO PROTOTYPE * The NPV of this project is below the prototype store value by $3 174 000 the following factors contributed to the variance. * Lease, site work and real estate tax costs must be contained in order to mitigate the risk, they contributed a negative $78 912 000, $10 168 000 and $637 000 respectively to the variance from prototype store. * Sales contributed a positive $99 963 000 to the variance from Prototype thus if sales could be increased and the above costs contained this project would be desirable. 3. Internal Rate of Return (IRR) HURDLE ADJUSTMENT (CPR Dashboard) Internal Rate of Return is an important alternative to NPV; the IRR summarizes the merits of the project. This rate is an internal rate in a sense that it depends only on cash flows of a particular project or investment, not on rates offered elsewhere hence internal rate of return. * The project has an IRR of 9. 8% which is below the prototype store IRR as required. * Sales has to increase by 31. 1%, gross margin has to increase by 4. 58 percentage the cash outflow related to the construction costs has to decrease by $41 070 000 before the project can achieve the required IRR. * Transfer sales must increase by 36. % to achieve desired IRR. * The IRR of this project is far from what is required for the project to be approved. RISK/OPPORTUNITY ANALYSIS * If sales declined by 10% Store IRR would decline by (1. 0) percentage point, if gross margin decreased by 1 percentage point, Store IRR would decline by (0. 7) percentage point and If construction cost increased by 10% Store IRR would decline by (0. 1) percentage point. * If sales increased by 10%, Store IRR would increase by 1. 0 percentage point, this is a positive indication. * The IRR does not present a big risk as a 10% decline in sales only has a 1 pp decline.

The 10% sales increase also results in a 1 pp increase. VARIANCE TO PROTOTYPE * The IRR for this project is below the prototype store IRR the following factors contributed to the negative IRR. * Land cost and real estate taxes must be maintained at current levels as they contributed a positive 0. 1 and 0. 2 percentage point respectively to the variance prototype however site work costs must be contained they contributed a negative (2. 6) percentage point to the variance from Prototype. * Sales have to increase they contributed a positive 1. 9 percentage point to the variance this is below the negative 2. pp by site costs. 4. Projected profits The profit and loss summary suggests that the project will make a projected loss of ($1 599 000) in the first year of opening the store compared to the prototype store value of ($1 136 000). By the fifth year the store will be making Earnings before Interest and Tax (EBIT) of $14 034 000 a year ($8 509 000) prototype store value. Although the projected is making losses in the first year, it should be accepted on the basis of the profits it will make as this will increase the share value. 5. Projected earnings per share

Earnings per share are affected by both the NPV and the earnings/profits of the project/investment. This investment/project has a positive NPV and earnings in the long run which will results in increased earnings per share. 6. Investment required This store requires an investment of $119 300 000 and was scheduled to open in October 2008. This is a huge investment. The NPV is positive; the population is big. The income median of the population is $48 500 which is good. The returns on this investment would be achieved among other things by the savings that would be made from the adverting costs.

Target already spends in excess of $100 000 000 in advertising this project will allow them huge marketing and advertising on no cost thus reducing advertising bill. It will also enhance brand image and visibility. 7. Impact on sales of nearby Target store There is a high density of Target stores (45 stores) in the trade area and sales would be expected to come from existing targets stores as there are many. This is a huge metropolitan area so Target would be able to tap to new consumers and those of the competition. Conclusion * This project should be accepted by the CEC based on the above criterion.

The project presents lots of risks and opportunities to Target stores. The opportunities far outweigh the risks, positive higher NPV, increase EBIT, additional store to meet target and increase brand image. The project can still be accepted with the IRR figures although they are below a prototype store value. The IRR is based on an internal value, if for an example the projected may be funded by borrowed funds and the debt cost are below the IRR it would be a perfectly acceptable investment. As long as the project has a positive NPV this will increase the share value.

This project is important because of the trade area a metropolitan area and an urban center this will go a long way in achieving the strategic goals of market penetration, brand visibility. $119 300 000 is a lot of money but it can be financed through debt at a rate lower than the IRR. Goldie’s Square: SUP04M; Store NPV: ($3,319) HURDLE ADJUSTMENT (CPR Dashboard)| Sales| NPV| Sales would have to increase by 45. 1% to achieve Prototype Store NPV | IRR| Sales would have to increase by 47. 2% to achieve Prototype Store NPV| | | Gross Margin| NPV| Gross Margin would have to increase by 4. 4 pp to achieve Prototype Store NPV | IRR| Gross Margin would have to increase by 4. 91 pp to achieve Prototype Store NPV| | | Construction (Building & Sitework)| NPV| Construction costs would have to decrease by ($22,167) to achieve the Prototype Store NPV| IRR| Construction costs would have to decrease by ($14,576) to achieve Prototype Store IRR| | | Full Transfer Impact| NPV| Sales would have to increase by 62. 5% to achieve Prototype Store NPV| IRR| Sales would have to increase by 63. 1% to achieve Prototype Store IRR| RISK/OPPORTUNITY| 10% Sales Decline| NPV| If sales declined by 10% Store NPV would decline by ($4,073) |

IRR| If sales declined by 10% Store IRR would decline by (1. 1)pp| | | 1 pp GM Decline| NPV| If margin decreased by 1 pp, Store NPV would decline by ($3,929)| IRR| If margin decreased by 1 pp, Store IRR would decline by (1. 1) pp. | | | 10% Construction cost increase| NPV| If construction cost increased by 10% Store NPV would decline by ($1,470)| IRR| If construction cost increased by 10% Store IRR would decline by (0. 3) pp. | | | Market Margin, Wage Rate, etc| NPV| If we applied market specific assumptions, Store NPV would increase by $6,059| IRR| If we applied market specific assumptions, Store IRR would increase by 1. pp. | | | 10% Sales increase | NPV| If sales increased by 10%, Store NPV would increase by $4,008| IRR| If sales increased by 10%, Store IRR would increase by 1. 1 pp| VARIANCE TO PROTOTYPE| The Goldie’s Square with a store NPV of ($3,319) is ($18,222) below the Prototype Store NPV. The following items contributed to the variance. | Land| NPV| Land cost contributed a positive $1,501 to the variance from prototype. | IRR| Land cost contributed a positive 0. 3 pp to the variance prototype. | | | Non-Land Investment| NPV| Building/sitework costs contributed a negative ($581) to the variance from Prototype. IRR| Building/sitework costs contributed a negative (0. 1) pp to the variance from Prototype. | | | Sales| NPV| Sales contributed a negative ($16,455) to the variance from Prototype. | IRR| Sales contributed a negative (4. 4) pp to the variance from Prototype. | | | Real Estate Taxes| NPV| Real Estate Taxes contributed a negative ($2,682) to the variance from Prototype. | IRR| Real Estate Taxes contributed a negative (0. 7) pp to the variance from Prototype. | 1. Strategic importance Target wants to build a Super Target store in this area.

Targets already have twelve stores in this trade area but are expected to have twenty four eventually. The Goldie’s Square market is considered a key strategic anchor for many retailers. The Goldie’s Square center included Bed Bath & Beyond, JC Penney, Circuit City and Borders. This is hotly contested area with affluent and fast growing population, which could afford good brand awareness should the growth materialize. Investing in this project will achieve strategic goals of having more shops in the locality and brand visibility. The area is fast growing and affluent.

The population is growing at a good rate of 16% and has a $56 000 median income. 2. Net Present Value HURDLE ADJUSTMENT (CPR Dashboard) * The project has a positive net present value of $300 000. This NPV is very low however it is still positive. A positive NPV value will results in an increase in share value. * Based on this factor the project should be accepted as it will increase share value. * This NPV is far below the prototype store which is a minimum requirement the projected sales must increase by 45. 1% and gross margin must improve by 4. 64 percentage point before it can achieve the prototype store NPV. The site work cash outflows must decline by $22 167 000 and transfer sales from other stores in the trading area will have to increase by 62. 5% before the prototype store NPV can be achieved. * The NPV is positive that is acceptable however the projected NPV is below the prototype store which is factor to be considered in order to evaluate the project. The projected sales will have to increase by a huge percentage in order to reach the prototype store NPV. It is doubtful that the NPV will ever reach the prototype. The CEC must consider other critical factors in the adjudication process.

RISK/OPPORTUNITY ANALYSIS * If projected sales declined by 10% the NPV would decrease by $4 073 000 (1 358% decline) of the NPV and If gross margin decrease by 1 percentage point the NPV would decrease by $3 929 000 (1 310%) decline in NPV. * Should construction costs increased by 10% the NPV would decline by $1 470 000 (490%) decrease of the NPV and if market specifics assumptions on market margins, wages etc are applied the store NPV would decrease by $6 059 000 (2 020%) of the prototype store NPV. * If sales increased by 10% the NPV would increase by $4 008 000 (1 336%) increase in the NPV. This project has very low NPV figures and this project presents greater risks. A 10% decline in sales reduces the NPV more than a thousand times for an example. The NPV figures aren’t that positive due to the risk factors. VARIANCE TO PROTOTYPE * The NPV of this project is far below the prototype store value the following factors contributed to the variance. * site work, sales and real estate tax costs must be contained in order to mitigate the risk, they contributed a negative $581 000, $16 455 000 and $2 682 000 respectively to the variance from prototype store. Land contributed a positive $1 501 000 to the variance from Prototype. 3. Internal Rate of Return (IRR) HURDLE ADJUSTMENT (CPR Dashboard) * Internal Rate of Return is an important alternative to NPV; the IRR summarizes the merits of the project. This rate is an internal rate in a sense that it depends only on cash flows of a particular project or investment, not on rates offered elsewhere hence internal rate of return. * The project has an IRR of 8. 1% which is below the prototype store IRR as required. * Sales has to increase by 47. 2%, gross margin has to increase by 4. 1 percentage the cash outflow related to the construction costs has to decrease by $1 576 000 before the project can achieve the required IRR. * Transfer sales must increase by 63. 1% to achieve desired IRR. * The IRR of this project is far below from what is required for the project to be approved. RISK/OPPORTUNITY ANALYSIS * If sales declined by 10% Store IRR would decline by (1. 1) percentage point, if gross margin decreased by 1 percentage point, Store IRR would decline by (1. 1) percentage point and If construction cost increased by 10% Store IRR would decline by (0. 3) percentage point.

If market margin, wage rate etc the IRR would increase by 1. 6 pp. * If sales increased by 10%, Store IRR would increase by 1. 1 percentage point, this is a positive indication. * The IRR does not present a big risk as a 10% decline in sales only has a 1. 1 pp decline. The 10% sales increase also results in a 1. 1 pp increase. VARIANCE TO PROTOTYPE * The IRR for this project is below the prototype store IRR the following factors contributed to the negative IRR. * Land cost must be maintained at current levels as they contributed a positive 0. 3 percentage point to the variance prototype.

Site work costs and real estate taxes must be contained they contributed a negative (0. 1) and (0. 7) percentage point respectively to the variance from Prototype. Sales have to increase they contributed a negative 4. 4 percentage point to the variance. 4. Projected profits The profit and loss summary suggests that the project will make a projected loss of ($1 921 000) in the first year of opening the store compared to the prototype store value of ($654 000). By the fifth year the store will be making Earnings before Interest and Tax (EBIT) of $2 951 000 a year (2 343 000) prototype store value.

Although the projected is making losses in the first year, it should be accepted on the basis of the profits it will make as this will increase the share value. 5. Projected earnings per share Earnings per share are affected by both the NPV and the earnings/profits of the project/investment. This investment/project has a positive NPV and earnings in the long run which will results in increased earnings per share. 6. Investment required This store requires an investment of $23 900 000 and was scheduled to open in October 2007. This is not a huge investment. The NPV is positive; the population is big, growing at 16%.

The income median of the population is $56 000 which is good. The returns on this investment are not that impressive. This project is however important because of its strategic location, all the big retailers want to capture this market for visibility and market capitalization. Since this is not a huge investment it may be considered. 7. Impact on sales of nearby Target stores There are about twelve Target stores in the trade area and sales would be expected to come from existing targets stores as there are many. This trade area has a lot of Target stores competitors so most of them will come from them and new markets.

Conclusion * This project can be accepted by the CEC because it is not a huge investment. The project presents lots of risks. The store has a positive NPV although it is quite low, increase EBIT, additional store to meet target and increase brand image. The project can still be accepted with the IRR figures although they are below a prototype store value. The IRR is based on an internal value, if for an example the projected may be funded by borrowed funds and the debt cost are below the IRR it would be a perfectly acceptable investment. As long as the project has a positive NPV this will increase the share value.

This project is important because all retailers was a foothold of this area. This place will go a long way in achieving the strategic goals of market penetration, brand visibility. Stadium Remodel: SUP1. 1 /S 04; Store NPV: $14,911 RISK/OPPORTUNITY| 10% Sales Decline| NPV| If sales declined by 10% Store NPV would decline by ($7,854) | IRR| If sales declined by 10% Store IRR would decline by (1. 8)pp| | | 1 pp GM Decline| NPV| If margin decreased by 1 pp, Store NPV would decline by ($6,457)| IRR| If margin decreased by 1 pp, Store IRR would decline by (1. 5) pp. | | | 10% Construction cost increase|

NPV| If construction cost increased by 10% Store NPV would decline by ($910)| IRR| If construction cost increased by 10% Store IRR would decline by (0. 3) pp. | | | Market Margin, Wage Rate, etc| NPV| If we applied market specific assumptions, Store NPV would decline by ($11,317)| IRR| If we applied market specific assumptions, Store IRR would decline by (2. 7) pp. | | | 10% Sales increase | NPV| If sales increased by 10%, Store NPV would increase by $6,216| IRR| If sales increased by 10%, Store IRR would increase by 1. 5 pp| 1. Strategic importance This remodeling is very important to maintaining a good image of the brand.

In its current condition the store is deteriorating and dilapidating. The facilities are tarnishing the image of the brand. Target already spends millions of dollars in advertising all this money would be wasted if the facilities are in this state as it would count the good work. This remodel is thus strategic in maintaining a positive brand. 2. Net Present Value RISK/OPPORTUNITY ANALYSIS * If projected sales declined by 10% the NPV would decrease by $7 854 000 (52. 67% decline) of the NPV and If gross margin decrease by 1 percentage point the NPV would decrease by $6 457 000 (43. 0%) decline in NPV. * Should construction costs increased by 10% the NPV would decline by $910 000 (6. 1%) decrease of the NPV and if market specifics assumptions on market margins, wages etc are applied the store NPV would decrease by $11 317 000 (75. 9%) of the prototype store NPV. * If sales increased by 10% the NPV would increase by $6 216 000 (41. 69%) increase in the NPV. * This project has a good NPV however sales decline are a risk and if the store is not remodeled the sale will decline and reduce profitability and NPV. 3. Internal Rate of Return (IRR)

RISK/OPPORTUNITY ANALYSIS * If sales declined by 10% Store IRR would decline by (1. 8) percentage point, if gross margin decreased by 1 percentage point, Store IRR would decline by (1. 5) percentage point and If construction cost increased by 10% Store IRR would decline by (0. 3) percentage point. If market margin, wage rate etc the IRR were applied would decrease by 2. 7 pp. * If sales increased by 10%, Store IRR would increase by 1. 5 percentage point * The IRR present a risk as a 10% decline in sales only has a 1. 8 pp decline. The 10% sales increase also results in a 1. pp increase. 4. Projected profits The profit and loss summary suggests that the project will make a projected loss of ($6 103 000) in the first year of opening the store compared to the prototype store value of ($4 812 000). By the fifth year the store will be making Earnings before Interest and Tax (EBIT) of $1 272 000 a year ($4 025 000) prototype store value. Although the projected is making losses in the first year, it should be accepted on the basis of the profits it will make in the future as this will increase the share value. 5. Projected earnings per share

Earnings per share are affected by both the NPV and the earnings/profits of the project/investment. This investment/project has a positive NPV and earnings in the long run which will results in increased earnings per share. 6. Investment required This store requires an investment of $17 000 000 and was scheduled to open in March 2007. This is not a huge investment. The NPV is positive; the population and should the facilities of the store be improved sales will improve. 7. Impact on sales of nearby Target stores There will be no real impact on nearby stores as this is an existing store.

The customers that they might have lost due to the condition of the store might be seen coming back mainly from the competition others from nearby stores were shoppers would have sought refuge. Conclusion * Target has to accept this project it has a positive NPV and if this investment is not made the brand image would be tarnished due to poor, deteriorating facilities. This will be against the strategic imperative of projecting a good brand presence. Final Conclusion: Recommendations to the Capital Expenditure Committee The capital expenditure committee should accept all the proposals before it.

This will be based on the factors as detailed on part three of this document. The NPV’s of all these projects are positive, a positive NPV contributes favorable to the share price or share value. The Internal Rate of Return of these entire projects are below the prototype store IRR which is a benchmark project. The IRR is an alternative to NPV however if the NPV is positive and the IRR is not what is desired, the NPV may supersede in making an investment decision. The IRR is what is expected based on internal factors. Projects with a low IRR may be funded through debt capital if cost of debt is below the project IRR/ rate of return.

An overarching objective of Target Corporation is to meet the corporate goal of adding 100 new stores a year while maintaining a positive brand image. Since all of these shops have a positive NPV and in the long run they all make good earnings before interest and taxes. The CEC must accept them because they will achieve the goal of market capitalization and brand visibility. The Stadium remodel is particularly important because the store has deteriorating and dilapidating facilities that would defeat the purpose of a positive brand image.

The store must be remodeled before it starts affecting the sales of other Target stores with bad publicity. Whalen Court is to be open in a metropolitan area and it is an urban center. The population of this trade area is very big and has a good income median. The project requires a lot of capital investment; however it presents Target stores with a unique contribution in that it would offer free advertising to the corporation. There are a lot of consumers passing by and Target already spends in excess of $100 million dollars in advertising opening this shop might help reduce these costs.

If funds are a limiting factor, Target should fund the projects in the following other: 5. Gopher Place should be considered first. The project requires a 23 000 000 investment. It has the best NPV and it is above the prototype store NPV. The sales can still decline by more than 5% and it would still be above the prototype store. It has a better EBTI compared to the other costs, though its present’s risks it offers opportunity as well. 6. Whalen Court may be the second in line. It has a positive NPV although it is below the prototype store value. If sales improve by 1. 9%, it would be equal to the prototype store NPV.

This is a better NPV compared to the remaining two projects. The store provides a good market with a huge population and better income median. 7. Goldie’s Square, the NPV is positive but the sales must still rise by 45. 1% before it can meet the prototype store NPV. The NPV is not as good as can be expected but it is still positive. What makes this a desirable investment is the location that the store will be built in. Project is important because of its strategic location; all the big retailers want to capture this market for visibility and market capitalization. Since this is not a huge investment it may be considered. 8.

Stadium Remodel is paramount that the CEC makes this investment failing that the poor state of the facilities would tarnish the image of the brand. The NPV is positive and EBIT. Strategy analysis Sales growth in the retail industries comes from two main sources: establishing of new stores and organic growth through existing stores. New stores are expensive to build, but are necessary in order to tap into new markets and gain access into a new pool of consumers that could potentially represent high profit potential depending on the competitive landscape. Increasing sales of existing stores is also an important source of growth and value.

If an existing store operates profitably, it could be considered for renovation or upgrading in order to increase sales volume; or if a store is not profitable, then management must consider it a candidate for closure. Target needs not only look at establishing new stores, but should also employ growth strategies to grow sales of already existing stores and apply the above policy. Target needs to be cautious of its growth strategy of opening approximately 100 new stores a year. Doug Scovanner must learn some lessons from both Wal-Mart and Costco, then take the best out of those lessons.

In year 2000, Wal-Mart had 4189 shops enjoying sales of $178billion. On average, this meant that each shops made sales of $178 billion/4189 = $42,5million per year. They grew by 6141-4189=1952 shops in 5 years to 2005. This was on average about 1952/5=390 shops per year. In year 2005, each shop was on average enjoying sales of $309billion/6141shops=$50,3million per year. If one looks at the rate at which sales grew in the 5 years, it is clear that Wal-Mart only grew its sales by about 15. 5% per shop in 5 years after investing in 1952 shops from $42. 5million per shop in year 2000 to $50. 3 million per shop in year 2005.

On the other hand, if one looks at Costco, by 2005, they had grown to 433 warehouses and were enjoying sales of $52,9 billion. On average, this translates to each shop making average sales of about $122,4 million. Bearing in mind that these two companies each had its own sales strategy, also had a different customer base, and a less often overlap on merchandising assortments, but still Wal-Mart’s strategy of massive investment in new shops has not delivered better that what Costco has been able to achieve through its fewer shops which account for 7% (433 Costco warehouses compared with 6141 Wal-Mart shops) of Wal-Mart shops in number by 2005.

In order for Target to survive and beat Wal-Mart and Costco out of competition, it would need to out-beat them in their strategies. For example, Wal-Mart’s success was attributed to its “everyday low price” pricing strategy that was greeted with delight by consumers. This strategy created challenges for local independent retailers who needed to remain competitive. Also, in addition to growing its top line, Wal-Mart had been successful in creating efficiency within the company and branching into product lines that offered higher margins than many of its commodity type of products.

These strategies are exactly the strategies that Target must also adopt learning from the success of its competitor which it shared almost the same merchandising assortments and trade area. On the other hand, Costco owes its success and good sales to the membership-fee format it used. It shared its customer base more closely with Target. Membership fees accounted for a significant growth source and are highly significant to operating income in a low-profit-margin business. Costco also provided discount pricing for its members in exchange for membership fees.

Target’s strategy of pricing competitively with Wal-Mart on items common to both stores, is a good strategy for Target. But if Target were also to adopt the Costco strategy of membership fees and offer very marginal discount which is just bellow Wal-Mart, which it will supplement with membership fees, this strategy could see Target making more profit margins than its competitors. This will add to the already successful Target strategy of offering credit to its customers through its various credit facilities.

In 2005, Target had 1397 stores in 47 states and boosted sales of $52,6 billion. This means that average sales per store were about $38 million. Costco still beat both Wal-Mart and Target when it comes to sales per store. This makes us to arrive at the conclusion that the real competitor of Target was Costco, since Target did better than Wal-Mart. The other critical decision that Target board of directors has to re-look into is the practice of purchasing properties where it built stores.

This should really be considered after leasing has been ruled out of question. The core business of Target is retail, it is not property investment. With them buying these properties, could easily make them to end up using money that could have been used in organically growing the existing stores. Bibliography Firer, C. Ross, SA. Westerfield, RW. Jordan, BD. Fundamentals of Corporate Finance. 4th South African Edition. 2009. McGraw-Hill Education(UK)