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.
Johnson Controls, Inc. (JCI) was founded in 1885 by Warren Johnson, who was the inventor of the first electric room thermostat. This company was based out of Milwaukee, Wisconsin and is now a global leader in the building and automotive industries. It has more than 1300 locations worldwide, over 170,000 employees, and is traded on the New York Stock Exchange under the symbol JCI. The company is made up of three major sections: Building Efficiency, Automotive Experience, and Power ...view middle of the document...
With the emerging “going green” market, Johnson Controls could use the discounted payback period to lessen the investment risk of ‘going green’ projects. You see this capital budget method may not be as good as the net present value method (NPV) but it does tell the business owner or financial manage when the initial investment will be recovered based on the discounted cash flow. The managers of Johnson Controls would need to use the discounted payback rule which states that “an investment is good or acceptable if its discounted payback period is less than some pre-determined # of years.” (http://www.financescholar.com/discounted-payback-period.html)
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.
Inflation could really have a negative impact on some of Johnson Controls planned investments in China. One of which is the planned $200 million automotive battery plant. “The state-of-the-art facility will supply automakers and the aftermarket in China with high quality maintenance-free lead-acid starter batteries and advanced batteries for Start-Stop vehicles.” (http://seekingalpha.com/news-article/3093961-johnson-controls-announces-plans-to-build-automotive-battery-manufacturing-facility-in-tianjin-china) Inflation causes uncertainty about future prices, interest rates, and exchange rates, and this in turn increases the risks among potential trade partners, discouraging trade. Inflation increases transactions and information costs, which directly inhibits economic development. For instance, when inflation makes nominal values uncertain, investment planning becomes difficult. Individuals may be reluctant to enter into contracts when inflation cannot be predicted making relative prices uncertain.
So inflation could cause major problems on the planned automotive battery plant, because automotive industry is rapidly growing in china and inflation could cause sales to decrease thus lowering the need for the maintenance-free lead-acid starter batteries and advanced batteries for Start-Stop vehicles. If management were to look at all four approaches for evaluating capital investments on automotive batter plant in China, they would be able to see from the results which method gives the best feedback and if it is a good investment or not. This would include looking at possibility of inflation.
Contrast the modifications you would make in evaluating the projects to increase internal capacity in North America to evaluating expansion projects in the global...