Johnson Controls Capital Investment Paper
Assignment #2: “Johnson Controls Capital Investments”
ACC 560
Nadine Gilles
December 2, 2012
Professor Linda Chess
Johnson Controls, Inc. follows a carefully an outlined capital budgeting process. There are many methodologies to supplement the traditional methods for evaluating the capital investments of Johnson Controls, Inc. The three traditional valuation methods, transaction, income, replacement cost, are appropriate for nearly all valuation analyses. However, over the past decade or so we have seen the growth of a new family of valuation methods based on future contingent events. This family of methods includes real options, binomial models, and Monte Carlo simulations. They are all based on decision tree models where the conditional events required for the IP to generate value are modeled explicitly. At the core of each of these methods is a two-step process: first, compute the probability of the favorable event occurring that will make the IP valuable, and second, compute the payoff if the favorable event occurs (usually using one of the traditional three methods described above). …show more content…
Often, assessment objectivity is difficult to do internally and requires an outside perspective, as the answers may not always be apparent. An outside perspective would engage Johnson Controls Inc. to help them in their efforts to conduct an independent evaluation of the markets and the internal capabilities they needed to be successful in those markets. The resulting analysis would help them identify a key capability that has been overlooked. Success in the new markets would not hinge on simply delivering the U.S.-coveted brands, but in securing exclusive licenses for the same or similarly-positioned brands overseas. In order for the retailer to achieve success in the new markets it would need to find the right suppliers for those
ACC 560
Nadine Gilles
December 2, 2012
Professor Linda Chess
Johnson Controls, Inc. follows a carefully an outlined capital budgeting process. There are many methodologies to supplement the traditional methods for evaluating the capital investments of Johnson Controls, Inc. The three traditional valuation methods, transaction, income, replacement cost, are appropriate for nearly all valuation analyses. However, over the past decade or so we have seen the growth of a new family of valuation methods based on future contingent events. This family of methods includes real options, binomial models, and Monte Carlo simulations. They are all based on decision tree models where the conditional events required for the IP to generate value are modeled explicitly. At the core of each of these methods is a two-step process: first, compute the probability of the favorable event occurring that will make the IP valuable, and second, compute the payoff if the favorable event occurs (usually using one of the traditional three methods described above). …show more content…
Often, assessment objectivity is difficult to do internally and requires an outside perspective, as the answers may not always be apparent. An outside perspective would engage Johnson Controls Inc. to help them in their efforts to conduct an independent evaluation of the markets and the internal capabilities they needed to be successful in those markets. The resulting analysis would help them identify a key capability that has been overlooked. Success in the new markets would not hinge on simply delivering the U.S.-coveted brands, but in securing exclusive licenses for the same or similarly-positioned brands overseas. In order for the retailer to achieve success in the new markets it would need to find the right suppliers for those