Johnson Controls Capital Investments

Johnson Controls Inc 2012 financial forecasts Summary Johnson Controls Incorporated announced on October 2012 that it hoped to document the sales and profit margins for the fiscal year of 2012. During the fourth quarter of 2011, the company recorded a total earning amounting to $10.7 billion. In its 2012 forecasts, the company speculates that there will be an increase in its automotive production in China and North America, with comparatively equal measure of European production against the results achieved in 2011. The firm forecasts that there will be revenue growth of approximately 6% in the year 2012 owing to its automotive experience in the sector. There will be a reflection of the increased global production in terms of quantity. The new programs for market expansion that were launched by the company are expected to generate a minimum of $1.4 billion in the year (Selko, 2012). In the year 2012, the company will see increased production of automobiles in China and the Northern America, whereas the production of the same will remain relatively flat in Europe versus the prospects realised in 2011. The forecast calls for approximately 6% revenue growth in 2012 by its Automotive Experience venture, hence a reflection of increased volume in the global production and approximately $1.4 billion in new program launches, partially counterbalanced by the negative impact of a weak Euro. Without including currency, total revenues would increase by 9%. In china alone, Johnson Controls boasts of 44% market share in seatings and hopes that total revenues will increase by 21% to an approximation of $4.8 billion. The worldwide efficiency market is hoped to generally increase in the year in relation to its market expansion strategies, especially in China and Middle East, which have favourable market potentials. Building efficiency earning is expected to increase by 10% owing to the strong backlogs, a significant development in services and expansion of its energy efficiency and worldwide solution ventures. Other Methods of Evaluating the Capital Investment to reduce risks Some capital expenditures are selected due to the aspect of being necessary; such as government regulations with regard to environmental requirements and conditions on how to deal the same (Averkamp , 2012).After making the necessary budget for the required capital expenditures, Johnson Controls should use the following methods for evaluating capital expenditures for the new markets. Payback method: This is a calculation on the expected number of years within which the company is to make the amount of money spent on a particular project. However, this system is widely criticized due to its inconsideration of the time value of money. Another aspect is that the cash flows in the entire project life are also not taken into consideration Return on Investment: This system evaluates the increase in financial profit in comparison to the increment in investment. The system is also inconsiderate on the aspect of the time value of money. Internal rate of return: This approach considers the aspect of time value of money and evaluates the flow of cash in the entire project life. The method computes the rate at which the future cash flow will discount to be equal to the cash expenditure of the entire project. Net present value: This system discounts the project’s future flow of cash by a rate that is predetermined, for instance the targeted or expected rate. If the cash flows discounted by the expected rate are found to surpass the cash investment, then the project is deemed acceptable. In other words, the project in this case, capital investment ought to provide the expected or targeted returns. If not, then there is no reason as to why the project should be continued. As a matter of reducing risks, Johnson Controls should employ the profitability criteria as an important step to curb the risk of revenue loss. These criteria will show the prospect of reasonable profitability and can be measured in ways such as the rate of return, net present value as well as payout time. The financial analyst undertaking this prospect must have a good understanding of his or her information and data so as not to create uncertainty over the anticipated value of the venture. The p...