6) OL’s senior executive decided to undertake this project in 1997. Why did OL make this major investment despite the fact that the decision could not be supported by their own capital budgeting (or AAR method)? We provide 3 reasons why OL’s senior executives might made this major investment despite the fact that the decision could not be supported by their own capital budgeting method. Reason 1: There was an undoubted need for growth and expansion. There was concern that customers would eventually get bored with the existing attractions and facilities, resulting in a severe shortage of customers. Reason 2: OL had a number of stakeholders it had to please including: the parent company, the main bank, landlords, and shareholders. The group of 22 banks headed by the Industrial Bank of Japan (IBJ) believed that Japanese industries would shift toward the service industries so it shifted its lending targets accordingly and was quite willing to lend to OL, as it considered OL to be a potential future leader. With the support of IBJ, the new borrowing from OL wouldn’t have any problems and this ease the new investment. Furthermore, OL received 750,000 tsubo of land, and 300,000 tsubo is unused. This pressure OL in finding a way to utilize the unused land, and this DisneySea Park seems to be a solution (i.e. if OL can build the DisneySea Park on this unused land, they wouldn’t have to give back the land to the government). Reason 3: With the new project, we can see a higher growth in Income After Tax from year 2001 onward as shown below:
Without new Project
With new Project
Income After Tax
Income After Tax
* New Investment into project cost 3389.30
Because there was concern that customers would eventually get bored with the existing attractions and...
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