1. The capital budgeting system for Target has three different entities. These entities include the real estate managers, the research and planning group, and the capital expenditure committee. The approval process of the capital budget allocation will start with the proposals that are passed on to the real estate managers, which they manage the specific geographical regions. The real estate managers will develop the proposal by gathering and satisfying the different details and all of the requirements in order to prepare it for the pitch to the CEC. The proposal is processed would then be sent to research and planning. The research and planning group would make sure of the variety of different demographic and site specific data to generate the sales estimates and the other forecasts. These estimates would be compiled with the work of the real estate managers in order to comprise what is known as the request dashboard for the capital project. Once it has been reviewed by the CEC, they will decide if the proposal will be accepted or rejected.
Although the system is relatively upfront, the problem lies in the different expenses that were incurred by the real estate managers and the research and planning group in preparation and the development of the proposals. There were also some sunk costs that were incurred in the inception and development of the proposals. The firm will not be able to account for the emotional aspects of the sunk costs so the researchers believe that there are certain incentives and proposal development reimbursement. All of these things are required in order to boost the rate of the development of Target. This is especially true in the midst of the market that is extremely competitive. The real estate managers and the research and planning personnel will be involved in the development of the proposal for the project will be rewarded. 2. I believe that Doug Scovanner should accept the Whalen Court for several reasons. The first reason is that it is going to give a rare opportunity for Target to enter into the urban center of the major metropolitan area. The second reason is that it will provide Target a major brand visibility and the free advertising for all of the people who pass by the store. This is because of the large amount of foot traffic and the high fashion appeal that Target brings to the market. The third reason is the free advertising. The fourth reason is the large population that lives in the area where the Target is going to be placed.
There are some risks that are involved with this deal. The first risk is that it requires a huge investment of $119,300 and the returns are very uncertain. The second risk is that the property is only under a contract lease. The third risk is that the store design that is different than the typical layout of the store. The fourth risk is that the low IRR that is valued at 9.8%.3. The need for the multiple hurdle rates will simply address the differences with the risks of the individual projects and the differences in the risk of the corporate divisions. The basic idea is that the higher the risk is for the project, the higher the hurdle rate is going to be. In this situation of Target, the use of the multiple hurdle rates to determine the net present value of the future cash flow accounts not only for the time value of the money and also the risks of the future cash flows. When the corporation assigns the discount rate of 9% to the sales at the store and the 4% to the credit card sales, then it helps to represent the different costs of the capital for funding the store operations. It also accounts for the amount of debts that were observed over the different Target stores. On the other hand, in order to see if the estimated discounted rates that are reasonable, many of the companies use their weighted average cost of capital if the risk profile of the project is similar to that of the company.
It is simply computed as: WACC=E/V*Re + D/V*Rd*(1-Tc), where
Re = cost of equity
E = market value of the firm’s equity
D = market value of the firm’s debt
V = E + D
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
Tc = corporate tax rate
If the firm accepts the projects that are equally risky as the firm, then the firm risk will substantially not to increase and the firm’s cost of capital remains unchanged as well. In the case of Target, using the cost of the capital as the discount rate is more appropriate. In the effects, using the weighted average cost of the capital serves to gauge if the discount rate is reasonable and it should be higher than the former as the firm decides to take more assets.4. I would continue to approve the CPRs because they will have a great impact on the short-term and long-term profits of the company. It does not matter if the CPRs require using the external funds because the CEC will make the right decision on which one of the CPRs to accept. These projects will be able to contribute to the growth of the company as well as the create value for its shareholders. It is good to spend external funds so that the budget will allocate the firm’s operations should not be deducted.
There are many factors that the company will need to consider along with the NPVs and IRRs of each of the CPRs. We accepted the Whalen Court CPR even though it had a high investment that was required. This was because of the demographics of the area, which was high in population and there was a high number of people who had a college education. It would not have been a good idea to choose the Goldie’s Square deal regardless of the positive NPV and IRR. This is because it had a lot of different competitors in the area so it would require a lot of sales that would equal the same as the prototype for Target (Bruner, 2013).
References:
Bruner, Robert, Eades, Kenneth, and Schill, Michael. (2013). Case Studies in Finance. Irwin
Publishing: Toronto, Ontario.
