Johnson Controls Capital Investments
Introduction
Johnson controls is a firm that’s international. The company manufactures products, services and
also offers solutions to utilize energy and other efficiencies in building, for instance lead acid
batteries and other advanced forms of batteries for hybrid and electric cars. They also specialized
in the making of automobile seats.
Johnson Controls was initially incorporated in Wisconsin in the year 1885 under the name of
Johnson Electric Service Company. Its primary production function was in the manufacture of
automatic temperature control units and regulation systems for standard buildings, their
installation and servicing.
The net sales for the year 2012 were 41,955 million compared to 40,833 for the year 2011. These
represented an increase of 3% in the year 2012. Johnsons capital projected earnings are expected
to be similar to 2012 only slightly higher. The net increase in sales is due to the increased
earnings in its automotive experience business segment. Due to the unfavorable impact of
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foreign currency exchange Johnson’s capital lost $1.2 billion. These affected its performance and
the ratings climb down from 6% to 3% on its overall growth and net sales. The cost of sales
increased by 3% in the year 2012 from the previous year. Gross profit for same period was also
the same. The selling, adminstrative and general expenses for the year 2012 were $4438 million
while 2011 incurred 4393 million for the same expenses which represented an increase of 1%.
Equity income increased by 14% in the year2012 from the previous year. These was achieved
because of the gain of the redemption of the warrant for some existing semi owned affiliate
equity in one of its affiliate’s restatement of the previous periods earnings in one of its segments
i.e. power Solutions business.
rate at 5.9% in 2010 and maintaining it. For these reasons then out of the four countries, Japan is
doing much better than the rest.
Suggest a methodology to supplement the traditional methods for evaluating the capital
investments of Johnson.
Johnson controls incorporation was founded by warren Johnson in the year 1885 was the
inventor of the initial electric thermostat. Based in Milwaukee, Wisconsin, it embarked on the
building and the automotive industries. It has over 170000 employees in 1300 different
locations. It’s trading as JCI in New York Stock Exchange. The company has specialized in
three different sections i.e. Building efficiency, Automotive Experience and Power Solution.
They are very innovative and deeply committed to the sustainability of their efficiencies and
innovative skills while accelerating fast into the international market. The methodology that suits
the style and type of Johnson Controls companies and management techniques while
evaluating its major capital budget criteria in its investments plans is the discounted pay back
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method. A company with different aspects of business activities operations like Johnson
controls will find the discounted payback risk evaluation technique very useful. The discounted
payback method is the period required to recoup the initial cash invested in projects that’s equal
to the discounted cash value of the expected inflow of cash. (Bhandari, 1986, p.18) This
concept is where the total present values of the inflows of cash are accumulated and calculated
until they are equal to the investment initially made. The
prominence to the time value of cash and the discounting of the total future cash flow which is
relatively similar to the NPV approach before it finally obtains the value for the ultimate payback
period. To assess the risks facing Johnson controls, since it’s a market leader in one of its
segments of Energy savings performance contracting, it would be advisable for the
management to use and apply the discounted payback period in its calculations. (Lucey, 1996)
- Assess the potential impact of inflation on planned capital investments in China and examine
approaches for an accurate evaluation of the investments. Suggest how this knowledge may
impact management’s decisions.
Economist expect that there will some growth in china’s factories output. For the months of
January and February in the year 2012 a growth of 10.5 % was expected in the industrial sector.
Fixed investment growth is expected to be 20.6% above the initial target of 16%. Retail sales
are also expected to stabilize.
Between the years 2010 and 2011; china was facing tough economic times. Importers have
been compelled to accept very sharp prices. Trying to contain the situation may result in lower
inflation rate which will definitely be good sign for buyers but the Chinese currency will also
increase in value also. A stronger currency makes the imports to be cheap but the exports are
not profitable.
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http://www.qualityinspection.org/china-inflation
Standard deviation is a statistical measure that shows how much a return behaves and varies over
a certain period of time. A return that varies so much has a higher standard variation. Historical
standard deviation is analyzed together with historical returns to show whether an investment’s
risk rate or volatility would be within acceptable range if given the returns it produces. A
standard deviation that’s high suggests a wider dispersion of average past returns hence a higher
historical volatility. Standard deviation does not measure the performance of a firm or
investment but it only indicates the volatility of its earnings over a defined period of time..
(Dorfman, 1997)
The management top decision making organ have to weigh all the factors and the calculations of
the degrees of risks that are existing within the Johnsons capital control. If the risk factors are
very high then the investments will not be profitable. The management have to make final
decisions.
- Examine the benefits of using sensitivity analysis in evaluating the projects for Johnson
Controls and how this approach can provide a competitive advantage for the company.
Investment projects are mostly exposed to a variety of variable factors which can ultimately
affect the firm’s profitability. In defining the impact and effect of the variable factors on the firms
profitability and the management and its decision makers utilize and apply the sensitivity
analysis to assess the risk factors.(Arnold, 1996)
Sensitivity analysis is one way of showing the likely effects of uncertainty and other factors by
adjusting the values of main factors and showing the ultimate effect on the project. After the
sensitivity analysis the managers can make the best decision. The higher the rate or the level of
sensitivity in relation to other factors of the environment is, the more risky the project. If
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uncertainties about parameters are not there then the sensitivity analysis can be applied and
used for checking the profitability of specific project and its future values. Sensitivity analysis
can be applied to assess the riskiness of a particular scenario or strategy. A trade off can be
explicitly traded between risk and the eventual benefit in the model or within the model.
Sensitivity analysis assists the decision makers to decide the most profitable and the best
variant. It’s also used to show the eventual profitability of specific future investment and the
various factors that can affect it or have an adverse effect on its profitability. In commercial
building industry or investment projects i.e.in the sensitive AIRR (Accounting Internal Rate of
Return) is to these factors or variables. The sensitivity analysis advantage in these regard is the
technique that assists to anticipate the negative consequences on the particular project, defend
it and prepare the ‘what if ‘questions. It can also be used to measure or on any measure of the
response on the major sensitive variables. IRR (Internal Rate of Return) is actually the most
cost sensitive concept in risk assessment approaches. Sensitivity analysis can be applied the
time is limited for more sensitive and sophisticated technique. It also shows the ultimate effect of
the variable factors on the outcome of a project. (Drury, 1992)
To conclude, making decisions is a very challenging area in management. Decision making is
actually impossible without the possibility of threats and risks that can affect the profitability of
the firm. In order to give a clear prediction of the conduct of the future projects, there is need to
analyze the firm or group of variable factors which can ultimately affect the project.
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Reference
Lucey T. (1996) Management accounting. London: DP publications
Arnold J. (1996) Accounting for management decisions. Prentice Hall Europe
Drury C. (1992) Management and Cost Accounting. London: Chapman & Hall
Dorfman, S. (1997). Introduction to Risk Management and Insurance (6th Ed.). Prentice Hall.
