Managerial Accounting ACC560
Professor Dr. Ralph J. Palumbo
June 8, 2014
Johnson Controls, Inc. began in the late 1800’s with Warren Johnson. Warren Johnson was the invented of the pneumatic temperature control system while he was a college professor to prevent his classes from being continually interrupted by janitorial staff. This invention quickly spread to use in buildings all over the world resulting a fast paced business growth and so began the Johnson Service Company. From the beginning of the company’s inception, the focus was on energy efficiency and exploration of new innovations to meet the needs of customers. ...view middle of the document...
In order to gauge how an investment will perform an organization will employ various methods of appraisal. The most common methods used evaluate investment opportunities include the cash payback period, Net Present Value or NPV, Internal Rate of Return or IRR and the profitability index or PI. Of these, the most widely used are the NPV and the IRR.
The NPV measures the cash in-flow from a project. The Net Present Value method involves discounting net cash flows to their present value and then comparing that present value with the capital outlay required by the investment (Weygandt, Kimmel, & Kieso, 2012). This process calculates the value of a project in terms of dollars. The IRR measures the interest yield of a project. The IRR is the discount rate that leads to a zero value of the NPV. Among all capital investment appraisal techniques, IRR is generally considered to measure the efficiency of the capital investment. ("Capital Investment Appraisal - Capital Investment"). The IRR in that it takes into consideration the time value of money. Typically after the company examines investments with these evaluation methods, a comparison will be done of the proposed projects by the projects profitability index to determine which project should be chosen.
While it is important for Johnson Controls, Inc. to utilize the appraisal methods mentioned above when considering investing in emerging markets there are other, non-financial factors involved that need consideration in order to mitigate the risks. Non-financial factors can 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. These non-financial considerations should be taken into consideration and assessed as the risks that they impose on the investment.
Impact of Inflation
Johnson Controls, Inc is planning on expanding its business to include China, in doing so they must take into account the inflation rate. Inflation is simply a rise in the average price of goods and services in the macroeconomy (J. Harvey, 2011). Inflation can negatively affect investments in volatile foreign economies and need to be assessed prior to investing. Inflation can increase the costs of labor, materials and transportation, therefore decreasing the value of the investment. If the inflation rate goes higher than the rate of return, Johnson Controls will lose money.
In order to have an accurate value of investments, Johnson Controls, Inc should take into account the fluctuations in the inflation rate in China. The IRR and the NPV can both be used in evaluation of foreign investments with the addition of an adjustment made to compensate for the forecasted inflation rates in the Chinese market. Johnson Controls, Inc. should review the last ten years inflation rate for China and analyze the potential influences affecting inflations rates and how this will impact the rate...