Canberk Dayan

Professor Weissman
TARGET CASE STUDY
This report analyzes different CPRs(capital project requests) that exceed
$100k in capex. There are 5 CPRs (Gopher Place, Whalen Court, The Barn,
Goldies Square, and Stadium Remodel) for the November meeting, and
each of them will be analyzed both via quantitative and qualitative analysis,
and ranked in order to consider for acceptance or rejection.
In project financing there are two financial measures that are commonly
used: NPV & IRR. In a theoretical scenario, a company should accept a
project if the NPV is greater than 0, and the IRR exceeds the cost of capital of
the firm. Therefore the higher NPV & IRR, the more attractive a project gets.
However besides the quantitative analysis, it is also very important to
consider outside factors that directly affect sales and costs. For a retail
company like Target, the demographics are very important: median income,
population and its growth etc. Furthermore its important to realize potential
spillover effects of the project on the company, both positive and negative.
In other words, a project can be very attractive financially; however it may
damage a companys reputation or even cannibalize its existing sales for
certain products or vice versa.
Here is a summary of projects Advantages and Disadvantages:

Project
Analysis
Target is
focused on creating a shopping experience that appealed to the profile of its
core guest: a college-educated woman with children at home who was
more affluent than the typical Wal-Mart customer while competing with
Walmart prices, Expect more. Pay less.
In a retail company like Target, establishing stores in areas with the right
demographics has the upmost importance; customers are the only factor
that drives the sales. Not only the characteristics of the customers, but also
the quantity of the potential customers is significant as well. As the quantity
of the potential customers increase, the more revenue a retailer company
like Target will expect to obtain. Therefore considering the demographics of
each project, we see that Whalen Court has the most optimal demographics
for Target. With 632k population of which 45%+ are 4-yr college graduates
Whalen has the highest potential customers. However, given that Target
already has 45 operating stores in the area, decreases Whalens
attractiveness. Therefore we created a metric, in order to calculate # of
potential customers per target store for each of the area. (Population x %
with college degree / $ target stores)

We see that The Barn has the highest # of potential customers compared to
any other projects.
When we compare NPV & IRR of different projects we have the following
table:

We see that Whalen has the highest NPV among all the projects, however
one metric should not be the determining element for a project analysis. In
order to determine the dollar return on an investment, we looked at
NPV/Investment. It is seen that The Barn has the highest $ NPV return on
initial investment with 158%, compared to Whalen with 22%. On the other
hand, sensitivity is another measure Target has to consider. When we take a
look at the change in NPV values given 10% decrease in sales, we see that
Whalen has the highest decrease, whereas The Barn has the lowest, with
20%.
Conclusion
Overall, considering the advantages and disadvantages of each projects, we
believe that The Barn should be the chosen project. Quantitatively, it is
attractive because it has:
1)
2)
3)
4)
5)

Low capex requirements

Least sensitivity to changes in sales
Highest IRR
Highest NPV/Capex ratio.
Prototype NPV achievable with 18% below R&P forecast

On the other hand, qualitatively, the Barn has a few features that makes it
attractive as well. First of all there are no other Target stores within 80-90

miles. This means that people who are interested in the shopping experience
Target offers, will choose Target over Walmart or Sams Club. Second, The
Barn also has the highest number of potential customers. This makes the
Barn not only quantitatively but also qualitatively the most attractive project
investment among all 5.