Target Case Analysis

1) Be prepared to describe and critique Target’s capital-budgeting system. Give specific consideration to the role of the real-estate managers and the makeup of the CEC.

Target’s capital budgeting system consists of a multi-layered approval process in which only the projects that meet quantitative benchmarks, such as NPV and IRR goals, make it to the CEC for investment approval. Multiple parties put a significant amount of work forth in the initial stages of the proposal process. Since all of this pre-work requires expenditures up front, feasibility of these projects should be taken into consideration before they are even pursued by real-estate managers and budgeting teams so that wasted time and money is minimized. The CEC should also diversify its membership to include lower level managers as well as real estate and R&P experts. These additional members could bring greater insights and approaches to valuing projects than the current goal of management to add 100 new stores a year to meet growth objectives.

Target’s CEC also looked at projects with negative net present value (NPV). While this would seem counterintuitive, these projects may have strategic importance for future growth in the company. The committee also made sure the projects didn’t create financially straining precedents in the future. For example, Target may look to reject projects that had positive NPV, but investment costs were substantially higher than normal. Ultimately, the goal was to keep approvals for projects within the budget constraints set for the year. By minimizing unexpected debt on the balance sheet, Target was able to keep investors happy while continuing to invest in new projects for future revenue growth.

2) Which of the five CPRs should Doug Scovanner accept? Be prepared to explain how each of the considerations that follow influenced your decision:

NPV and IRR, Size of the project, Cannibalization of other stores’ sales, Store sensitivities, Variance to...