TARGET 1-09-2002 TO 1-09-2003TARGET 1-09-2002 TO 1-09-2003 TOTAL SHAREHOLDER RETURNTOTAL SHAREHOLDER RETURN

Dividends paid + change in stock priceDividends paid + change in stock price

TSR=TSR=Initial stock priceInitial stock price

= ( 0.26 + 37.05 – 31.42)/31.42) = 0.1792 = 17.92%= ( 0.26 + 37.05 – 31.42)/31.42) = 0.1792 = 17.92%

ECONOMIC PROFIT(Impact of $ 1 MM Cost of R&D)

NOPAT = EBIT – TAXESNOPAT = EBIT – TAXES

= 2676 – 853 = = 2676 – 853 = 18231823 EP = NOPAT – Capital ChargersEP = NOPAT – Capital Chargers

= 1823 – 526 = = 1823 – 526 = 12971297

Assume Target treats R&D as corporate Assume Target treats R&D as corporate overhead (SG&A) and R&D has a 1 MM budget: overhead (SG&A) and R&D has a 1 MM budget: Then EP would beThen EP would be 1296 1296 or a change ofor a change of - 0.08% - 0.08% in the EP.in the EP.

Make vs. Buy DecisionMake vs. Buy Decision R&D has researched production and R&D technologies for

eyewear and concludes:

1. We should not build our own production facilities, because:

– Large and efficient facilities already exist and can be employed under contract to manufacture our products at comparatively low cost. We could not match their low cost of plant and labor (Example: Foresight Optical 1)

– Construction of a manufacturing facility would delay the time to market of our product

2. We can produce enough units on sophisticated laboratory / small-scale production equipment to:

» Test the market with our innovative designs now and in the Test the market with our innovative designs now and in the futurefuture

» Generate an economic profit within 2 yearsGenerate an economic profit within 2 years

R&D PROPOSED BUDGET

Direct MaterialsClass 1000 Clean Room 65,000

Eclipse LX Surface blocker 17,000

SGX turbo Surface Generator 12,500

Acuity Finer and Polisher 9000

Stratum Lens Coater 9000

Kappa SP Lens Finishing System 6500

Innovations Lab Software 1200

Consumables 11,000

131,200

R&D PROPOSED BUDGETDirect Labor

Director R&D 110,000Associate Director 90,000Chief Design Engineer 85,000Design Engineer (6) 420,000Technician (6) 210,000

915,000

Overhead Rate *

Other Direct CostsTravel 55,000Consultants 60,000Special Testing ** 35,000

150,000 * Use Target pool / direct labor **XPS/SIMS Surface analysis (Columbia University)

R&D PROPOSED BUDGET

Indirect Labor

Custodial staff 30,000

Security 35,000

65,000

Indirect Material

Office supplies 5500

Utilities (laboratory) 15,000

20,500

1,281,700

Appendix: Capabilities-Foresight Optical

TAIWANManufacturing-Space: 2,367 square meters.-Injection Molding : 14 machines (mostly 250 ton)-Automatic central material supply incorporation humidity control dryer system-Standard Clean room fully automated Lens coating facility-Clean 1000 room for specialty coating systems.-Ultrasonic cleaning-Annealing & Curing-Hard coat system-Vacuum Deposit

Product development- R&D Department-In-house mold making-Fully Equipped Test lab

XIANAMENManufacturing- Employee: 200+- Space : 12,000 sq.mt- Building : A 6858 sq.mt. B 6,000 sq.mt.- Injection Molding Machines : 22 machines, mostly 250 tons- Clean room enclosed Lens coating facility- Ultrasonic cleaning- Annealing & Curing- Hard coat system- Vacuum Deposit …5 machines

Daily production capacity: 120,000+ pair