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Tokyo Disneyland and the DisneySea Park:

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1 Tokyo Disneyland and the DisneySea Park:
Corporate Governance and Differences in Capital Budgeting Concepts and Methods Between American and Japanese Companies Alvaro Fernandez Yizhen Liu Daniel Mejia Yitian Xue

2 Agenda Oriental Land Corp. and Tokyo Disneyland
Negotiation with The Walt Disney Company Position of OL’s various stakeholders The new capital investment – DisneySea Park Financial assumptions Capital budgeting methods (NPV, IRR, AAR, ACFR) Differences in American and Japanese cultures Selection of capital budgeting techniques Post Script

3 The Original Tokyo Disneyland
April 1979  Oriental Land Corp. (OL) signed a license agreement with WD. 10% on admission fees and 5% on food beverages and novelty goods. December 1980  The construction of Tokyo Disneyland began in Maihama District April 1983  Tokyo Disneyland opened its doors for business Fernandez Mejia Liu Xue

4 “Wanted the royalties but wanted to pay nothing”
The competitor The Mitsubishi Estate Group. (foothills of Mt. Fuji). They offered WD 2450 acres in exchange for WD constructing Disneyland. No agreement. MEG didn’t like the conditions. OL accepted the condition knowing that it would be hard for them to overcome. “Wanted the royalties but wanted to pay nothing” Fernandez Mejia Liu Xue

5 Tokyo Disneyland Statistics
The number of visitors never went below 10 million per year. They reached a peak in 1998 with million. 75% of the attendance was from repeated visitors. 70% of the park’s visitors were from neighborhoods around Tokyo. 7000 ¥ ($59.31 US) as the estimated average of expenses per visitor. Fernandez Mejia Liu Xue

6 The Issue Most of the customers were repeat visitors. However, while customers were expected to return two or three times, it was not clear if they would come back for a forth visit. Alternative: OL received an inquiry from their licenser, to consider the idea of constructing a new entertainment park, The DisneySea Park Project. Fernandez Mejia Liu Xue

7 Features of the Negotiation
OL would pay WD a licensing fee for the continuous use of the name “Disney”, WD would provide OL with valuable technical advice and management support for the new project. Tokyo Disneyland had to make a big decision since WD was proved as a tough negotiator. OL company also has a number od stakeholders that they had to please. Stakeholders: The parent company, the main bank, landlords and shareholders. Fernandez Mejia Liu Xue

8 Position of various stakeholders
The mitsui real estate group: Owned % of OL’s shares. Problems for them: Long period of time Very high licensing fees No risk sharing Landlord: The Chiba government office perceived an exaggerated request for land from OL’s shareholders (Keisei electric railway co and IBJ). 1 million Tsubo ( acres). Eventually OL got Tsubo. ( acres) later on, in 1988, the Chiba prefecture requested the use of unused park land of Tsubo. (245.06) Fernandez Mejia Liu Xue

9 Position of various stakeholders
The Main Bank: Tokyo Disneyland was financed by a group of 22 banks. Headed by the IBJ. The position of WD of taking no risk, just collecting the fee caused a lot of commotion amongst Japanese banks . However, the IBJ shifted its lending targets and was quite willing to lend to OL. They decided to lend ¥65 billion ($0.55 billion) to OL in August 1879 When the Disneysea park was being discussed total bank loans were ¥195 billion ($ billion) Fernandez Mejia Liu Xue

10 The New Capital Investment – DisneySea Park (1997)
Initial investment: ¥400 billion ($3.4 billion) Company’s total Assets: ¥ billion ($1.77 billion) EBIT: ¥28.32 billion ($0.24 billion) OL senior management wanted to know how long it would take for the Disneysea park to start generating profits, and also if the company’s current profit earning capability would be able to sustain the investment period, assuming construction would start in 2000. Fernandez Mejia Liu Xue

11 Tough negotiation WD wanted to maximize revenue from Japan with the licensing fees. The two companies could not agree. The relationship was unharmonious. OL’s top management went to the USA (August 1997) “Mr. Chairman, our president is furious. There is no point in any discussions. We have to ask you to go back to Tokyo”. –WD spokesman – OL’s top management strongly opposed to the licensing fee format for the second park. Fernandez Mejia Liu Xue

12 Financial assumptions
Initial investment of ¥400 billion (us$3.4 billion) in 2000 These would be the proportional values of each years level of sales Operating costs other than depreciation = 67% of sales Administrative expenses = 7% Other expenses = 4% Depreciation will be conducted using the straight-line method. (20 years) Borrowing interest rate= 4.34% 2/3 of the investment would be financed by the internal reserves. 1?3 by borrowings. Japanese taxation = 43%

13 The Capital Budgeting Exercise
American NPV American IRR Japanese AAR (Average Accounting Return) Common method of evaluating capital investment projects in Japan Pros: fits into Japanese management; easy to understand Cons: does not consider time value of money; depreciation not added IBJ ACFR (Average Cash Flow Return) Compromise between US and Japanese methods Fernandez Mejia Liu Xue

14 Cash Flows of the New Project
New Project would be an expansion of the existing company Hard to separate the expanding project from the existing company Difference between projections of cash flow with the project and without the project Fernandez Mejia Liu Xue

15 Projections of Cash Flow With the Project
Fernandez Mejia Liu Xue

16 Projections of Cash Flow Without the Project
Fernandez Mejia Liu Xue

17 Cash Flows of the New Project
New Project would be an expansion of the existing company Hard to separate the expanding project from the existing company Difference between projections of cash flow with the project and without the project Fernandez Mejia Liu Xue

18 Calculate NPV Initial investment – 3,400 million
Cost of capital – 5.56% Terminal value – cash flow of the fifth year/discount rate Fernandez Mejia Liu Xue

19 Calculate IRR Fernandez Mejia Liu Xue

20 Calculate ARR Average Accounting Return=Average Net Income/Average Investment Fernandez Mejia Liu Xue

21 Reject? Accept? Based on NPV – Yes Based on IRR – Yes
Positive NPV Based on IRR – Yes IRR 8.45% > Hurdle rate 5.65% Based on ARR – No Negative return Fernandez Mejia Liu Xue

22 Why Different Results? NPV and IRR are essentially the same technique
Same result Average Accounting Return Did not add depreciation Does not consider cash flow occurring after the operation period Does not pay attention to the salvage value Fernandez Mejia Liu Xue

23 Calculate ACFR Average Cash Flow Return = Initial Investment
Average Cash Flow + BV of Fixed Assets at the end of Project Average Cash Flow Return = Initial Investment Fernandez Mejia Liu Xue

24 Differences in corporate governance
Firm’s objective Maximizing shareholder wealth Principal-agent relationship Positive/negative incentives to get agent on the same line Value maximization Short-term; meet market expectations Firm’s objective Maximize corporate wealth Principal-agent relationship Far more complex; principles themselves can have different goals Value maximization long-term stakeholder wealth maximization Anglo-American Japanese Fernandez Mejia Liu Xue

25 Our opinion NPV? AAR? ACFR? or NPV Advantages: “Cash flow” is used
The time value of money is accounted for by discounting cash flow It holds true with US corporate governance NPV? or AAR? ACFR? AAR, ACFR Disadvantages: It does not take into account the matter of timing DCF is not used It ignores all cash flow occurring after the operation period Depreciation is not added to the refunding resources. Fernandez Mejia Liu Xue

26 Our opinion New Project ? Fernandez Mejia Liu Xue

27 Our opinion NPV and IRR fulfilled the threshold
NPV and IRR fulfilled the threshold Cash flow with the project is higher than the cash flow without the project and net income with the project will be increased up to million in 2004 Tokyo Disney Sea Park can also create huge employment opportunity

28 Post script DisneySea Park was opened on September 4th, 2001.
Most expensive theme park ever built. Fastest theme park in the world to reach the milestone of 10 million guests. Attracted an estimated 14 million visitors in 2013, fourth-most-visited theme park in the world. Tokyo Disneyland and Tokyo DisneySea are the only Disney parks in the world not owned by the Walt Disney Company. Fernandez Mejia Liu Xue

29 Thanks for watching

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