Please see the attached file for the case study to answer the following:
1. Critically evaluate which of the 5 projects the CFO should accept. The answer should explain and where appropriate illustrate how each of the following considerations influenced your decision:
a. NPV an IRR
b. Size of the project
c. Cannibalization of other stores' sales
d. Store sensitivities
e. Variance to prototype
f. Customer demographics
g. Brand awareness impact
2. Why does Target use different hurdle rates for the store and the credit cards (9% and 4% respectively)? What process would you use to estimate these discount rates to see if they are reasonable?
The retail industry includes many companies most of which offer similar product line. Examples of companies include Sears, JCPenny, Wal-Mart, Target and Costco. However each store had different strategy and a different customer base which made them difficult to compare. Target is often compared with Wal-Mart as both have similar formats and were located in each other's vicinity. They have similar commodities like food items, electronics, toys, merchandise and sporting goods. Wal-Mart gained huge success in the retail segment mainly because of its strategy of "everyday low prices". To combat the strategy of Wal-Mart, Target adopted the strategy of appealing to style conscious customers by offering unique assortments of home and apparel items, while pricing competitively with Wal-Mart on items common to both stores. The intense competition among retailers resulted in very thin margin which made every line item on the income statement very important for all retailers. As a result retailers put pressure on suppliers to lower prices apart from opting for low cost substitutes for their products. They adopted methods like just in time inventory management, low cost distribution networks and high sales per square foot to achieve operational efficiency.
Target was set up in 1962 with first store in Roseville, Minnesota. The company opened its first SuperTarget store in Omaha, Nebraska in 1999. By 2005, it had expanded to 1397 stores in 47 states, and revenues totaled $52.6 billion. Target had intense competition from Wal-Mart, which was realized by the company and made the strategy to offer customers a complete shopping experience along with low prices. The shopping experience was created by emphasizing on décor of the store for the right shopping ambience. Target focused on more affluent customers than typical customers of Wal-Mart. The company had also been successful in promoting its brand awareness with large advertising campaigns. These consistent efforts made Target brand one of the most recognized brands in the United States.
Target has been successful so far and a big part responsible for it has been its successful investment decisions. As a part of company's growth strategy Target had to open approximately 100 new stores each year. Every investment decision would have long-term implications for Target:
• If the ...
Different projects are analyzed based on several factors and a final recommendation is provided.