Tokyo Disney Case

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Executive Summary

Evidence from this case suggests that the traditional Japanese corporate governance stance has started to shift in order to include some elements of the Anglo-American way of corporate governance. It appears that a final decision has been made to build Disney Sea Park (despite unattractive ARR, but attractive NPV/IRR and ACFR) not only for the potential profits reaped for the company but also due to their responsibility to keep uphold the interests of its stakeholders (which would include its parent company, stockholders, landowners, suppliers, creditors, the local communities and government), whose livelihoods would be directly affected by this critical decision.

However, we also believe that the Japanese corporation Oriental Land (OL) was justified in exercising caution before investing the Disney Sea Park project. We base our reasons primarily due to the culture and norms of Japanese Corporate Governance practices.

The value of the investment is calculated using figures calculated in the period during 2000-2005 (note the project starts in 2000). Numbers used in the Appendix A and B are drawn directly from Case Exhibits 3-7. AAR will be calculated as indicated in Case Exhibit 2, and NPV and IRR calculations will be based on Discounted Cash Flows including Interest Payments (because in Exhibit 7, OL seems to include Interest in their calculations).

Case Background
The case describes how the OL management team was eager to expand the business beyond its Disneyland enterprise in Japan, and thus considers the investment in a new project - the Disneyland Sea Park.

Upon negotiating with Walt Disney (who are notoriously tough in their negotiation, demanding 10% royalty on entrance fees, 5% fee on food and novelty goods), OL management were initially skeptical in the project as it involved a huge risk for them – since they will not only solely invest in the land, but shoulder 100% of the construction cost as well.

In addition, unlike Anglo American companies who focus solely on maximizing shareholders wealth (especially in the short term), Japanese corporations such as OL would focus on maximizing corporate wealth for the long term (financial, technical, market and human resources), putting stakeholders on par with shareholders in their investment decision making process.

Average Accounting Return
In Japan, the most common method is to utilize the AAR method, as it most reflects the culture in which Japanese companies are run (e.g. they do not value opportunity cost of its assets, and rarely deal with foreign companies). When referring to Appendix A (attached), we will see that the calculated AAR = -1% which would lead the management team to conclude that the investment is unattractive and nonsensical to pursue.

However, using the AAR alone as an assessment tool may prove to be too simplistic as such a method does not take into account the time value of money, and the timing of cash flows. In addition, cash flows after the operating period are completely ignored and the calculations do not take into account the discount rate of the market.

Thus, we conclude that AAR may be useful as a rough measure of investment risk; however we feel it to be inadequate in assessing potential projects in the modern day of business.

Net Present Value and Investment Rate of Return
The Walt Disney team, however, are using the conventional ‘western’ methodologies: NPV and IRR; which addresses the shortcomings of the AAR method.

Referring to Appendix B1 and B2 (attached), the Discounted Cash Flow was calculated both from figures pieced together as given in the case (please refer to Assumptions column) and cross checked this with the cash flow numbers given in Exhibit 7 (in the case). The results are within close range of each other, and thus we are reasonably confident in the accuracy of the numbers.

Referring to numbers in Appendix B.2, at the end of the five year period, NPV works out to...
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