Capital Budgeting Analysis for Johnson & Johnson

Paper Summary:

This paper presents a capital budgeting analysis of Johnson & Johnson who manufactures and markets pharmaceuticals for both the health care and consumer markets. The paper examines their solvency and liquidity, as well as their growth over the pasty five years. The paper then analyzes their consistently high margins and discuses a financial ratio analysis of the company. The paper contains tables.

Table of Contents:
Executive Summary
Financial Ratio Analysis
Estimate of Capital Structure
Weighted Average Cost of Capital
Cash Flow Estimation
Capital Budgeting Analysis

From the Paper:

"The time frame for profitability is also fairly long. On a machine with a life span of eight years, it takes almost 6 full years to realize a payback. Remember that the profitability is highly sensitive to shifts in unit cost and unit price. Six years is a long time for the cost structure of the investment to change. If price pressures are felt, the project would become unprofitable almost immediately if they are unable to squeeze a corresponding cost decrease from their suppliers. For example, if at year three the unit price is squeezed, down to $195, and the suppliers cannot or will not adjust their prices to JNJ accordingly, the project's NPV becomes -106.48. This illustrates the real risk that price pressures have, even halfway through the project's life span."

Sample of Sources Used:

• JNJ financial statements and key ratios from Reuters, retrieved August 2, 2008 from http://www.reuters.com/finance/stocks/overview?symbol=JNJ.N
• JNJ long term bond information and pricing from Yahoo, retrieved August 2, 2008 from http://reports.finance.yahoo.com/z1?so=a&sf=m&is=johnson
• 3-Month CD rate obtained August 2, 2008 from http://www.economagic.com/em-cgi/data.exe/fedbog/cp3m
• Johnson, Steven H. (2005). Common Sense on Social Security. CSSS. Retrieved August 2, 2008 from http://www.sscommonsense.org/page04.html

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