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 …show more content…
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