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Capital Budgeting and Resource Allocation: Target Corporation

Case study on capital investment decisions made by Target Corporation

Carson Cathcart

on 26 January 2016

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Transcript of Capital Budgeting and Resource Allocation: Target Corporation

Capital Budgeting:
Target Corporation

Founded in 1902 as "Dayton Dry Goods Company"
The Dayton-Hudson Corporation opened its first Target store in 1962 in Roseville, Minnesota, a suburb of St. Paul
In the late '60's DHC expanded Target outside of the Twin Cities to a few test markets, including St. Louis
By 2000 Target stores were open nation wide and the Dayton- Hudson Company changed its name to The Target Corporation
In 2004 The Target Corporation made the decision to sell off all other subsidiaries and focus all of their resources on the Target chain. At this time there were 1397 Target store opened in 47 states
Today Target Corporation has nearly 1800 Target store locations. They are the second largest discount retailer in the world.
Target's two main competitors, as identified by investment analysts, are Wal-Mart and Costco
Target and Wal-Mart operate stores with very similar formats and merchandise assortments
Target and Costco tend to attract a very similar customer base. Although merchandise assortment is similar, Costco uses a whole-sale, membership-fee format
Competitors in the Retail Industry
History Continued
Capital Budgeting
In November 2006 Doug Scovanner, the CFO of Target Corporation, and the Capital Expenditures Committee (CEC) were presented with five projects representing nearly 200 million in proposed capital investments
CEC is committed to a growth strategy of opening 100 new stores a year
How much value was each project adding to Target financially and strategically?
Target had been a strong company because of its successful investment decisions. Weak stores drag on earning, while top-performing stores add value and spur growth
Case Study
2006 had been a lack luster year for Target shareholders
Scovanner wanted to make good investments that were consistent with the company's growth strategy
Is capital better spent on one project or another to create the most value and most growth for Target shareholders? Rank the five projects
Investment Five:
Stadium Remodel
Investment Two: Whalen Court
Investments Summary
1. The Barn, High NPV with low investment, new market. (Yes)
2. Gopher Place, High NPV, in a rapidly growing market. (Yes)
3. Stadium Remodel, Good NPV, stable with above average projections. (Yes)
4. Whalen Court, High NPV, but very sensitive to any change in sales projections. Despite the high dollar amount of NPV, it is relatively low for an investment of that size. There is a lot of strategic value, located in a heavily populated affluent area. (Yes)
5. Goldie Square, Low NPV, cannibalizes 54% of its sales from nearby stores. (No)
Investment One: Gopher Place
Investment Three: The Barn
Investment Four: Goldie Square
Investment Five: Stadium Remodel

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