Question

This case represents the ranking and choosing of projects. It highlights the strictly quantitative valuation techniques of IRR and NPV. Too often, financial analysis may skew decisions or ignore market growth requirements. How does Target deal with this problem?

The November Meeting Of the 10 projects under consideration for the November CEC meeting, Doug Scov- anner recognized that five would be easily accepted, but that the remaining five CPRs were likely to be difficult choices for the committee. These projects included four new store openings (Gopher Place, Whalen Court, The Barn, and Goldie's Square) and one remodeling of an existing store into a SuperTarget format (Stadium Remodel). Exhibit 7 contains a summary of the five projects, and Exhibit 8 contains the CPR dashboards for the individual projects. As was normally the case, all five of the CPRs had positive NPVs, but Scovan- ner wondered if the projected NPVs were high enough to justify the required invest-ment, Further, with stiff competition from other large retailers looking to get footholds in major growth areas, how much consideration should be given to short-term versus long-term sales opportunities? For example, Whalen Court represented a massive investment with relatively uncertain sales returns. Should Scovanner take the stance that the CEC should worry less about Whalen Court's uncertain sales and focus more on the project as a means to increase Target's brand awareness in an area with dense foot traffic and high fashion appeal? Goldie's Square represented a more typical investment level of $24 million for a SuperTarget. The NPV, however, was small at $317,000, well below the expected NPV of a SuperTarget prototype, and would be negative without the value contribution of credit-card sales As CFO, Scovanner was also aware that Target shareholders had experienced a lackluster year in 2006 given that Target's stock price had remained essentially flat (Exhibit 9). Stock analysts were generally pleased with Target's stated growth policyand were looking for decisions from management regarding investments that were con- sistent with the company maintaining its growth trajectory. In that regard Scovanner recognized that each of the projects represented a growth opportunity for Target. The question, however, was whether capital was better spent on one project or another to create the most value and the most growth for Target shareholders. Thus, Scovanner felt that he needed to rank the five projects in order to be able to recommend which ones to keep and which ones to reject during the CEC meeting the next day

Answer 1

If we go strictly by the quantitative valuation techniques then the project with the highest IRR has to be chosen eventhough all the projects may be NPV positive. Thus in terms of IRR the projects will be ranked as follows. Rank 1 repesents the best and Rank 5 the least best.

1. The Barn

2.Gopher Place

3. Stadium Remodel

4. Whalen Court

5.Goldies's square.

However in the given case apart from the quantitative factors, due consideration should be given to the qualitative aspects as well like brand building and creating brand awareness which may augur well for the long term growth of the company. Hence the final decision should be a trade off between the quantitative and qualitative factors.

While arriving at a decision the expectations of the shareholders have also to be taken into account.In the given case all the projects are earnings accretive which enhance share value.If we go strictly by the NPV over the life of the projects ignoring the investment required and taking the base case scenario into consideration then Whalen court produces the highest NPV. If we go by the principle of conservatism and choose the project with the highest NPV factoring in a 10% decline in sales, then " The Barn" has the highest NPV (20500-4066) =16343.

If were to weigh the long term growth prospects which will enhance shareholder value the maximum in the long term then Whalen Court has to be ranked 1. This is because it has a sizable population and provides a rare opportunity to improve brand visibility and awareness which will help in reduction of marketing spends in future. Whalen court also has the highest adult population who have the spending power.

Hence factoring both the quantitative and qualitative aspects the rankings would be

1. Whalen court

2. The Barn

3. Gopher Place

4. Stadium Remodel

5.Goldie's square