Case Study : 15 Capital Project Requests

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During their monthly meetings the Capital Expenditure Committee would generally review 10 to 15 capital project requests (CPRs). At the November meeting the committee would be reviewing 10 projects. Of these ten projects Doug Scovanner realized that five would be easily accepted, but the remaining five would be difficult choices for the committee. The five projects were Gopher Place, Whalen Court, The Barn, Goldie’s Square, and Stadium Remodel. These projects included four new store openings and one remodeling of an existing store into a SuperTarget format (Bruner, Eades and Schill). Each of these CPRs will be further analyzed based on the following criteria: NPV, IRR, size of the project, cannibalization of other stores sales, store sensitivities, variance of prototype, customer demographics, and brand awareness impact. The first capital project request that will be analyzed is Gopher Place. This store would come at a cost of $23 million which is $5.4 million more expensive than the prototype. The NPV and IRR for Gopher place is $16.8 million and 12.3% respectively. Sales at this location could decrease by 5.3% and still achieve the prototypes NPV. However sales would have to rise by 2.2% to achieve the prototype IRR. With a sales decline of 10 percent the store NPV would decline by $4.7 million and the IRR would decline by 1.3 percentage points. Target already operated five stores in this market and this store would be expected to derive 19% of its sales from these

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