Case

Johnson Controls, Inc. is a global company that offers services and products aimed at optimizing operational efficiencies and energy of buildings, electronics, automotive batteries and interior systems for automobiles. The company’s headquarters are located in Milwaukee, Wisconsin and is listed on the New York Stock Exchange as a fortune 500 company. Johnson Controls predicts that it will be able to increase its capital expenditures investments by $1.7 billion approximately. Most of the planned capital spending by the company will go to financing margin expansion and growth opportunities. This essay highlights the importance of companies to be able to evaluate investment decisions so that current and capital expenditure on proposed projects and schemes can be done prudently to ensure the company’s success (Johnson Controls (2015).

b) The decision to invest in projects increases the shareholders value of the company. This is consistent with the growth and from the NPV criteria, positive NPV of projects increases the shareholder's value.

Project finance is a kind of Financing that has a priority does not depend on the creditworthiness of the sponsors proposing the business idea to launch the project. Approval does not even depend on the value of assets sponsors are willing to make available as collateral. Instead, it is basically a function of the project’s ability to repay the debt contracted and remunerate capital invested at a rate consistent with the degree of

ii. The project should be accepted if the NPV is positive because such a project increases shareholder value.

The company should accept this project. The project payback period is between 2 to 3 years.

Thus, by year three the company will be making a profit off the investment as year three is 86.73 million profit by 55.35 cost giving the company a 31.38 million dollar surplus. Generally, a period of payback of three year or less is acceptable (Reference Entry) causing this project to be viable based off the payback analysis. Although, these calculations are flawed. The reason for this is because the time value of money is not taken into effect when calculating payback periods which is where IRR can further assist in a more realistic financial picture (Reference Entry).

The first project proposal is Match My Doll Clothing line expansion consisted of expanding matching doll and child’s clothing and accessories. The second project proposal is Design Your Own Doll by creating customizable “one of a kind” doll features through the company’s website. The project selection criteria would base on quantitative and qualitative analysis. The quantitative analysis would base on the evaluation of discounting cash flow forecasts to determining the Net Present Value (NPV), Internal Rate of Return (IRR), and the Payback period of each proposed project. The qualitative analysis would include the potential project value of the company’s overall strategy, innovation, key project risks, and the project interdependencies to the whole company.

The question that transcends the project is whether equity investors be sufficiently rewarded to justify there financing interests. The answer to this question is dependent

In my opinion the company should reject the project as the ARR is much less than expected and the payback period is nearly as long as the maximum payback period which could put company to danger.

Students may be familiar with the classic NPV criterion. This case invites them to focus on the internal rate of return (IRR). If the IRR is greater than the project cost of capital, the 7E7 is a positive net present value project.1 A discussion of why this is true provides a solid “big picture” foundation for the case decision. The project IRRs are presented in case Exhibit 9. Therefore, the focus of student analysis should be on determining the benchmark against which to evaluate the IRRs. Thus, this part of the discussion helps to motivate the analysis of WACC. Some students may have voted in a manner that contradicts the IRR versus the cost of capital decision rule. This sets up the next question.

There are a few things I would like to say about the construction project. The project is expected to maximize firm value if it has incremental cash flows above zero. If we are using the modified internal rate of return (MIRR) technique, this means that the MIRR should be above the cost of capital. As we can see from the spreadsheet, the MIRR is 18%. This means that the project is going to return that. The cost of capital should be the rate of return on our existing business. The way we maximize firm value is to undertake projects that offer a better return than our existing business.

The use of an accounting rate of return also underscores a project 's true future profitability because returns are calculated from accounting statements that list items at book or historical values and are, thus, backward-looking. According to the ARR, cash flows are positive due to the way the return has been tabulated with regard to returns on funds employed. The Payback Period technique also reflects that the project is positive and that initial expenses will be retrieved in approximately 7 years. However, the Payback method treats all cash flows as if they are received in the same period, i.e. cash flows in period 2 are treated the same as cash flows received in period 8. Clearly, it ignores the time value of money and is not the best method employed. Conversely, the IRR and NPV methods reflect that The Super Project is unattractive. IRR calculated is less then the 10% cost of capital (tax tabulated was 48%). NPV calculations were also negative. We accept the NPV method as the optimal capital budgeting technique and use its outcome to provide the overall evidence for our final decision on The Super Project. In this case IRR provided the same rejection result; therefore, it too proved its usefulness. Despite that, IRR is not the most favorable method because it can provide false results in the case where multiple negative

All the projects will be undertaken except for project 7 since it is mutually exclusive with project 8, and project 6 and 2 will not be undertaken since they have 0 and negative value.

Internal rate of return (IRR) and Payback period “IRR of a project provides useful information regarding the sensitivity of the project’s NPV to errors in the estimate of its cost of capital” (Pierson et al.2011, pp.157).This proposal also shows the project is profitable by using Excel to get the IRR of 18.9%, which is

The following paper analyzes a project from financial perspectives using the capital budgeting techniques like Net Present Value (NPV) and Internal Rate of Return (IRR).