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Target Corporation Case Study By: Floyd Long Submitted: November 5, 2013 I. Statement of the Problem It is November of 2006 and CFO of Target Corporation Doug Scovanner and the Capital Expenditure Committee must make important decisions involving the capital structure of Target. The end of the fiscal year was coming up and the committee of 5 must analyze the effects of 5 capital projects and choose which of these capital projects to accept or reject. These projects had to do with the decision of adding new stores or renovating existing stores. The committee had to decide which of these projects would have the best effect on future growth of Target and its earnings. II. Alternative solutions The CEC has 5 capital projects they need to analyze. These projects include 4 new stores and one remodeling. (Note: We have excluded one of the projects, The Barn, because of lack of financial data) 1. 2. 3. 4. Gopher Place Whalen Court Goldies Square Stadium Remodel When ranking these projects in order of least effective and feasible, we want to rate each project and place a rank on the following factors: 1. NPV and IRR 2. Demographics (provided to us in case) III. Analysis of Solutions For the analysis we will take the financial projections and demographics and place weights on importance. After we will then rank the projects in each category. We will then multiply each weight by the rank and calculate totals to see the final ranking for each project. We should first begin ranking the importance of each factor of business. Exhibit 1 shows us the rankings of each financial factor for each project. The factors are ranked one to five with five being the most important and the most focused on and one being the least important, thus having the least effect on our decision. The five financial factors we have chosen to give focus to are: NPV, NPV with a 10% drop in sales estimate, EBIT impact, IRR, and Size of Investment. We see the same thing in exhibit 2 for our demographic factors. The demographic factors we have chosen to give focus to are: population growth, current population, competition in surrounding area, median income, and percentage of adults with 4 years or more college experience. From this analysis we assume that NPV is the most important financial factor and future population growth percentage is the most important demographic factor. The factors within our financial category are the more important than the demographic factors. We then begin to assign weights to each factor in each category. We do this by displaying the amounts for each factor in each project, then divide them by the average of the total projects to get the weight. This is illustrated for the financial factors in Exhibit 3 and the demographic factors in Exhibit 4. For example: the average NPV for the four projects equals $14,675. To calculate a weight for Gopher Place, we take that project's NPV of 16,800 and divide it by the average to get a weight of 1.14. Next we will calculate the scores. To do this we take the rankings we got in Exhibits 1 and 2 and multiply them by the weights we calculated. This is illustrated in exhibit 5 for our financial factors and exhibit 6 for our demographic factors. Because we were not given the current population, population growth percentage, or competition for the Stadium Remodel, we assume the worse and make it the same as the worse number in that category. For example because the worst number in the population growth percentage factor is 3% we will assume the stadium remodel is also 3%. IV. Final Recommendation Exhibit 7 shows the total scores for each project. As we can see Whalen Court is the best investment out of the five with a score of 35.96. If we had to choose one of the four projects, this would be my choice. It is the least risky and best use of needed investment based on the factors we have set. It has a high score mainly because it has the highest NPV and EBIT impact out of all the projects. It also has the highest population out of any project, with the lowest competition impact. If I had to choose which out of the four to dismiss, it would be the Goldie's Square not only because it has the lowest score, but also because its score is significantly lower than the others. Even with the risk associated with not knowing certain demographic factors for the Stadium Remodel, it has a lower score. The main reason for this is the low NPV in comparison to the other projects' NPV. An NPV of 300 is not worth any amount of work that would have to go into the project and shouldn't be considered. Even though it has the second lowest investment cost, Gopher place has around the same investment cost with the highest NPV