Target Corporation: a Capital Budgeting Analysis Essay

1444 Words Jun 1st, 2011 6 Pages
Target Corporation: A Capital Budgeting Analysis

Target Corporation was founded in 1902 and headquartered in Minneapolis, Minnesota. Target Corporation operates general merchandise and food discount stores throughout the United States. The company’s products range from household essentials, to electronics, to toys, to apparel and accessories, to home furnishings, to food and pet supplies. Most of the merchandise is sold under Target and SuperTarget trademarks, but it also sells under private-label brands, such as Archer Farms, Circo, Merona, and Room Essentials. The company also offers merchandise through programs like ClearRx, Great Save, and Home Design Event. Additionally, Target markets its merchandise under license and designer
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However, smaller sized stores typically had higher NPV’s when compared to the larger sized SuperTarget stores that occupied 175,000 square feet. Tax and real-estate incentives in addition to local demographics are key factors of each projected new Target store. More affluent communities and population growth were attractive attributes as well.
A few areas of concern had to do with the capital-project request “dashboard” that were provided to the committee members. The dashboard was a template that contained all of the critical inputs and assumptions used for the NPV and IRR calculations. For example, the analysis of a new store included incremental cash flow projections for 60 years over which even included a store being remodeled every 10 years. Many assumptions must have been made to assume cash flows for this long into the future. Some companies have a hard time estimating even 5 years into the future (let alone 60). Also since Target’s credit card business was so large they used a different discount rate for calculating NPV and IRR for the store cash flows(9%) and the credit card cash flows (4%).

Capital Budgeting Project Assessment

Target makes a point to judge new capital budgeting decisions on more than just the financial data of the project. The firm has approved projects even if they do not have strong financials but further the marketing aim of the company. As evidenced by the 5 options the board is

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