This case study allows students to step into the shoes of the CFO of Target Corporation. As the CFO, one should look into several planned projects and take into consideration the pros and cons of these proposals. An upcoming November meeting with the Capital Expenditure Committee (CEC) along with the corporation's senior executives is being prepared. The CFO is tasked to present the merits of ten capital-project requests (CPR). Of these 10 projects, five are foreseen to likely be difficult choices for the Capital Expenditure Committee. After careful analysis, the CFO must decide what projects the committee should approve by considering the initial investments, NPV, IRR, and Profitability Index.
Kenneth Eades, David Ding, Saul Yeaton
Harvard Business Review (UV1057-PDF-ENG)
November 17, 2008
Case questions answered:
- Summarize the five projects in terms of initial investment, NPV, IRR, Pros, and Cons.
- Why does Target Corporation use different hurdle rates for the store and the credit cards (9 percent and 4 percent, respectively)? What process would you use to estimate these discount rates to see if they are reasonable?
- Out of the five projects which one should not be accepted by Target?
- Based on what we learned in class so far, what is your ranking of the five projects? If you can accept 3 out of 5 projects, what are your choices and why? (Hint: Projects are different in size.)
- In reality, the Capital Expenditures Committee (CEC) accepted Gopher Place, The Barn, and Whalen Court. How are their choice(s) different from yours? Why? What do you think the reasons for that might be?
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Case answers for Target Corporation
This case solution includes an Excel file with calculations.
Executive Summary – Target Corporation
Target first opened its door in 1962 under the Dayton Company who by 2000 officially changed its name to Target Corporation. The discount retailer concept flourished and led to Target becoming a major retailer with $52 billion in revenue by 2005.
“Expect more, pay less” was their slogan, and this mindset brought them to the top, being able to compete against dominant forces such as Wal-Mart.
Target’s strategy was creating a higher-end shopping experience for the customers. Their target audience was a college-educated family with children.
The CFO of Target Corporation and member of the Capital Expenditure Committee (CEC) was faced with preparing for the November meeting to discuss 10 potential projects for Target that will affect future store growth.
The CFO identified the following five projects that would likely be difficult choices for the Capital Expenditure Committee — the Stadium Remodel, Gopher Place, Whalen Court, The Barn, and finally, Goldie Square.
After careful analysis, if I were the CFO of Target Corporation, I would decide that the projects the committee should approve are The Barn, Gopher Place, and Stadium Remodel. I considered initial investments, NPV, IRR, and Profitability Index to decide which projects should make it.
These three investments offer safe and promising returns compared to the others & support the company’s goal of creating long and successful growth while maintaining our image.
1.1. The Company
The first Target store opened its doors in 1962 under the Dayton Company in Roseville, Minnesota. The name was chosen to differentiate it from Dayton’s upscale store. That concept worked and would later help Target become a major retailing powerhouse.
In 1995, the first Super Target store was opened. Four years later or in 1999, Target’s website was first launched. And in 2000, Dayton Hudson changed its name to Target Corporation.
Target has become a powerhouse retailer with $52.6 billion in revenues from 1,397 stores in 47 states. Since 2000 when Target had $30 billion in sales, the company has realized a 12.1% sales growth over these last five years. Target has planned to continue its rapid growth by opening 100 stores per year.
The Capital Expenditure Committee (CEC) comprises top executives that meet monthly to review all capital project requests (CPRs), which cost over $100,000. A typical CEC meeting involves the review of 10 to 15 CPRs.
The committee considers several factors in determining whether to accept or reject a project. One of the overarching objectives is to meet the corporate goal of adding about 100 stores a year while maintaining a positive brand image.
Of the 10 projects under consideration for the November CEC meeting, five projects would be easily accepted by Target Corporation. The remaining five CPRs were likely to be difficult choices for the committee.
These four new locations (Gopher Place, Whalen Court, The Barn, Goldie’s Square) and a remodeling (Stadium Remodel) were under consideration for implementation. Each project needed analysis to justify the required investment.
2.1 The Barn
This project would be worth the investment because it would boost Target’s brand awareness. This would be a new market. At this location, the nearest Target Corporation is 80 miles away.
This new project expects a good performance with a profitability index of 1.577 (Exhibit 3). This project’s relatively small investment of $13 million would allow for a large return even if sales goals were not met.
Exhibit 3 – Target Corporation Profitability Index
If we were to see something like a 10% decrease in sales, we could expect an NPV loss of $4.066 million and a decrease in IRR by 1.9%. When subtracted from our current expectations (Exhibit 2), it would leave us an NPV of…