2. Be prepared to describe and critique Targets capital-budgeting system.

Give specific
consideration to the role of the real-estate managers and the makeup of the CEC.
Question 2 and 3 are related to certain extent.

Targets capital-budgeting system mainly revolves around the Real-Expenditure Committee

(CEC). Also, the budgeting decisions are made by people in senior level of management, which
is different than most manufacturing companies in part because decisions are generally
delegated to plant or district manager. For Target, capital-project requests (CPR) more than
$100,000 are decided by the CEC and projects larger than $50 million are decided by the
majority board of directors. It is also important to note that the CEC meets monthly, which
helps senior management to keep themselves constantly updated about the new investment
decisions and how they can realize their objectives of 100 new stores every year.

The capital budgeting decision starts with a proposal from real-estate managers who are
responsible for operations in different geographical locations. They take various details like
site-specific data, demographic factors, and sales forecast among others, to develop a proposal,
which is then compiled with their work to form a capital-project request dashboard. This
dashboard is then reviewed by the CEC to make decision.

While the process might look readily simple, the process in preparing and developing proposals
can be related with incurring an emotional sunk cost. These costs cannot be accounted;
however, a reimbursement can be made by the CEC to uplift their process of development as
they go through a competitive environment. Similarly, together with the reward, the rejected
projects also should be taken into consideration with other financial measures and a standard
of quality of proposals should be facilitated before carrying out the final assessment of the
projects.

3. Explain what the dashboards tell you as a manager. Isnt the NPV enough information
for you to make a go/no-go decision? Any other capital budgeting tools might be useful
in your quantitative analysis? Why the various pieces of information have been chosen to
be part of the dashboard.

The dashboard provides financial summary including IRR, NPV, sales maturity, total net
investment, and incremental R&P sales maturity. Similarly, other details like risk/opportunity,
demographics, startup costs, competition, hurdle adjustments are also presented in the
dashboard.

On top of that, the dashboards financial data of NPV, and IRR gives a vision regarding whether
the company can be profitable in the future or not. This also helps in comparing different
project proposals and find which ones can be a fit. Together with that, the demographic
information can be considered to understand the market and create a customer segmentation
which could be beneficial in terms of the huge competition against other retail stores.
No. NPV alone is not enough to make a go/no-go information. Though a project might have a
positive NPV, it might not be high enough for the company to invest on, considering the return
on investments the company might be looking for. Similarly, a positive NPV might be good,
but the company might not have enough capital budget to fund the proposal.

As the future cash flows are estimates, those numbers can also change with a change in the
companys strategy. Also, if the initial investment required is too high, the project might be
dropped considering the risks it might have with a change in the market.

Similarly, Target might also finance a project with a negative NPV if it has something to do
with the competition in a new location; which could be a part of the companys overall strategy
of growing 100 new stores every year.

The CEC should consider NPV together with other qualitative aspects of the projects to meet
the companys objectives.