Johnson Controls Capital Investments Research Paper

Download this Research Paper in word format (.doc)

Note: Sample below may appear distorted but all corresponding word document files contain proper formatting

Excerpt from Research Paper:

Johnson Controls

Emerging markets are riskier than established ones, and because of that Johnson Controls should make some adjustments to the method by which it evaluates capital investments when dealing in emerging markets. The 2013 Outlook and Strategic Review does not explain how risk is evaluated at Johnson, but the company would normally subject its capital investments to analysis that includes sensitivity analysis, and NPV with sensitivity analysis.

For emerging markets, the hurdle rate would be higher in order to account for the higher degree of risk. China represents over 50% of Johnson's business in Asia, so the company has a significant amount of knowledge about the risk conditions in the Chinese market. Thus, the company can set a hurdle rate that is appropriate to the Chinese market using available information. The company can also estimate the growth rate of China for the coming years, and the risk of inflation. Essentially, taking the same macroeconomic and market indicators that the company would use to analyze domestic risk, and applying it to the emerging market, is the most appropriate way to evaluate emerging market risk.

With better methods for evaluating risk that are more appropriate to emerging market conditions, risk will be reduced. The reason for this is that with better information, the company will be able to understand only projects that fit within its risk preferences. For example, with a higher hurdle rate to accurately reflect risk of any given project specifically, the company will not undertake some projects that it might otherwise have undertaken, had it used its ordinary domestic hurdle rate. By reducing the number of risky projects that the company takes in emerging markets, the company will reduce its overall risk as well.

In addition, the use of sensitivity analysis will help Johnson Controls to improve its decision-making, by providing better information about how changes to different key input variables will affect the overall evaluation of a given project. This technique should be used for all projects, but especially in emerging markets were volatility in some variables -- especially economic ones -- can be significant. By determining how robust a project is in the face of dramatic changes to key variables, the company will make better decisions, based on better information.

2. China has generally been in a state of inflationary pressure for several years, and Johnson Controls knows this. The company will have built the current inflation expectations for China into its forecasts. However, the actual rate of inflation is sometimes different from the expected rate, something that happened with Chinese inflation earlier this year (Bloomberg, 2013). Usually, however, inflation in China is quite predictable (Zhang & Clovis, 2010), since the number from the central government is a work of fiction anyway.

When inflation increases beyond expectations, the present value of future cash flows declines. This is because those future cash flows are worth less in today's dollars, that value diminished by the higher rate of inflation. The ramification therefore is that some projects that might have had a positive net present value prior to the change in inflation could now have a negative net present value. Future cash flows always change when macroeconomic conditions change, especially inflation, because these changes will affect the present value of said future cash flows.

Known inflation projections should always be used when planning capital investments, as well as reasonable estimates for changes in inflation in the future. For example, China's currency is artificially undervalued, which is why the yuan has been on a long-run inflationary trend. One or two shocks in the future should be built into projections. If management is not making decisions about capital investments building in known projections for inflation, then management should be. However, there should also be a sensitivity analysis conducted on these projections, to test the viability of the project given a number of inflation scenarios -- expected case, worst case and best case. The range for inflation figures that can be tested would be developed using historical standard deviations.

3. As noted above, projects in emerging markets are riskier than projects in the developed world. As such, they should have higher hurdle rates. At Johnson Controls, expansion overseas is typically focused on countries it knows well. Thus, the company…[continue]

Cite This Research Paper:

"Johnson Controls Capital Investments" (2013, March 02) Retrieved December 9, 2016, from

"Johnson Controls Capital Investments" 02 March 2013. Web.9 December. 2016. <>

"Johnson Controls Capital Investments", 02 March 2013, Accessed.9 December. 2016,

Other Documents Pertaining To This Topic

  • Capital Investment Planning and Budgeting

    Capital Investment and Budget Planning Capital and Investment Budget Planning For all governments, long-term expenses are something they must deal with. This is to ensure that the continuing needs of an area are met through facilitating economic growth and addressing the demands of the general public. To fully understand this process requires examining the capital and investment budget planning process. This will be accomplished by comparing the city of Toronto's budget presentation

  • Johnson and Johnson Annual Report Review Financial

    Johnson and Johnson Annual Report Review Financial Report Review Company: Johnson and Johnson Consolidated Balance Sheets Total Assets: $121,347,000,000 Total Liabilities: $56,521,000,000 Total Shareholder's Equity: $64,826,000,000 Company's Retained Earnings: 85,992,000,000 Shares of common stock the company has been authorized to issue: 4,320,000,000 shares Shares the company has issued: 3,119,843,000 shares Cash (cash and cash equivalents): $14,911,000,000 Decrease in cash and cash equivalents during 2012: $9,631,000,000 F: Increase in cash and cash equivalents during 2011: $5,187,000 Consolidated Statement of Earnings Essentially, the term "consolidated" as used

  • Capital Budgeting Analysis Johnson &

    Approximately 19% of the short-term liabilities in the form of notes payable and other short-term debt. The long-term liabilities consist of long-term debt and other miscellaneous liabilities. The debt portion of this represents approximately 39% of the total long-term liabilities. Johnson & Johnson has issued notes onto the market that mature in 2017, comprising the bulk of the long-term debt. The calculate the market value capital structure of JNJ, we need

  • Fundamental Analysis of Johnson and Johnson Inc

    JOHNSON & JOHNSON The Fundamental Analysis of Johnson & Johnson Inc. (J& J, 2005) Economic and Market Analysis Globalization Industry Analysis Company Analysis Brief History of the Company Analysis of Capital Asset Pricing Model Intrinsic Value Valuation Measures Trading Information Competitors Awards & Recognition Our modern business world consists of an extremely competitive global economy where manufactures search for opportunities to strategically reduce costs and increase market share and profitability. Historically, the most often chosen solution for holding down costs was to systematically reduce

  • Coca Cola Company and Pepsico Investment

    The total asset turnover ratio on the other hand indicates that just as is the case with the fixed asset turnover ratio, the Coca-Cola Company has been less effective in the utilization of all its assets in sales generation. The inventory turnover ratio is essentially a measure of the number of times the inventory of a business entity is replaced or sold within a given period of time. In the

  • Human Resources as Critical Investments in an

    Human Resources as Critical Investments IN AN ORGANIZATION'S FUTURE The purpose of this paper is to explore whether or not the human resources (HR) within an organization should be used as critical investments. To support this exploration, the terms "human capital," "human assets" and "intellectual capital" will be discussed, on the merits of each specific term as well as in relation to one another. Finally a conclusion will be drawn that determines

  • Cash Flow Cost of Capital Financial Performance and Options

    Cash Flow The different authors use a number of quantitative approaches to understanding firm performance. Paunovic (2013) discusses the pricing and valuation of swaps. The author seeks to "demystify the structure of these financial derivatives (swaps) by presenting their valuation methods and by showing how they are used in practice." Thus, the author is presenting textbook explanations of swaps to her audience. Swaps are priced at par at the present time.

Read Full Research Paper
Copyright 2016 . All Rights Reserved