Johnson Controls - Capital Investments



1. Suggest a methodology to supplement the traditional methods for evaluating the capital investments of Johnson Controls in the emerging markets to reduce risk providing a rationale of how risk will be reduced.

Capital investments are evaluated by different methodologies depending upon the nature of risk and projects. There are three most popular traditional approaches to gauge the effectiveness of the investment. These approaches are; payback period, internal rate of return and net present value. Out of these approaches, NPV and IRR are the most popularly used by investors and companies.

Net present value is the widely used method by the academicians, investors and financial managers to compare and select from a pool of investments. It is a procedure to calculate the present value of a number of future cash flows, caused by an investment. The methodology is to discount the present value (i.e. update through rate) of all cash flows of the project future. This value is subtracted from the initial investment so that the obtained value is the net present value of the project. This concept is superior in the existing scheme as it calculates the value of the project in monetary terms (Rohrich, 2007, p. 55). This method works on the basis of the concept of time value of money. The internal rate of return (IRR or IRR) is a rate of discount which cancels the net present value of a series of cash flows (usually relating to a project with an initial investment tracking cash flow positive). The IRR is a decision tool for the investment. An investment project will generally retained if its IRR is sufficiently higher than the expected rate bank to take particular account of the risk premium specific to the type of project (Lumby, 1988).

The company must keep different financial and non financial factors in mind while making the investment decision. The financial factors include the financial indicator such as Net present value, internal rate of return, Payback period etc. NPV should be greater than zero for the project to be feasible. Moreover, greater the IRR, more attractive is the project. On the other hand, payback period should be as low as possible.

The non financial considerations include the economic situation, future trend of the economic indicators, analysis of the competitors, the political situation and the restrictions imposed by the local government. All these factors are equally important from investment point of view. Often, it is recognized that a full evaluation of an investment project requires an assessment of the dimensions of liquidity, profitability and risk. The evaluation of an investment is not limited to the determination of the parameters of liquidity, profitability and risk as other aspects should be considered equally important as their contribution to diversification, growth or overall business strategy (Lumby, 1988). Mathematical rigor is based on a set of assumptions whose fulfillment depends ultimately on the practical utility of the results obtained. Therefore, given the lack of certainty about the future, decisions on investments is one ...