Tokyo Disneyland and the DisneySea Park

1. Tokyo Disneyland and the DisneySea Park Mijia Zuo Yiming Xie Yutong Xiang Xinyue Luo

2. Agenda · INTRODUCTION TO DISNEYSEA PARK PROJECT · FINANCIAL ASSUMPTIONS · CAPITAL BUDGETING TECHNIQUES · COMPARISONS Xinyue Luo Yiming Xie Yutong Xiang Mijia Zuo

3. Xinyue Luo Yiming Xie Yutong Xiang Mijia Zuo

4. The Original Tokyo Disneyland · April 1979 Oriental Land Corp. (OL) signed a license agreement with the Walt Disney Company (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. Xinyue Luo Yiming Xie Yutong Xiang Mijia Zuo

5. The Competitor: Mitsubishi Estate Group · They offered WD 2450 acres in exchange for WD’s construction of Disneyland · The two companies ended up with no agreement. · OL accepted the conditions knowing that it would be hard for them to operate profitably Xinyue Luo Yiming Xie Yutong Xiang Mijia Zuo

6. Success of Tokyo Disneyland · the number of visitors never went below 10 million per year; they peaked in 1998 with 17,45 million · 75 % of the attendance was from repeated visitors · 70 % of the park’s visitors were from neighbourhoods around Tokyo · 7000 ¥（$59.31 US）as the estimated average of expenses per visitor Xinyue Luo Yiming Xie Yutong Xiang Mijia Zuo

7. Issue: New Attractions to Maintain Repeat Customers · Most of customers were repeat customers. However, there was concern that customers would eventually get bored with the existing attractions and facilities, resulting in a severe shortage of customers. · OL received an inquiry from their licenser, the Walt Disney Company, suggesting to build a new entertainment park: the DisneySea Park. Xinyue Luo Yiming Xie Yutong Xiang Mijia Zuo

8. Basic Information about the New Project · Geographical & Cultural Basis: Island country with attachment to sea · Target Audience: adults who had been children when Tokyo Disneyland was introduced. ·Large Investment: ￥400 billion ($3.4 billion) · Form of Cooperation: WD hoped to continue the licensing fee format while OL strongly opposed it. Xinyue Luo Yiming Xie Yutong Xiang Mijia Zuo

9. New Project: DisneySea Park Initial investment: ￥400 billion (US $ 3.4 billion) OL’s total assets: ￥355.18 billion (US $ 1.77 billion) Annual EBT: ￥28.32 billion (US $ 0.24 billion) Major Concerns: how long it would take for the DisneySea Park to start generating profits; if the company’s current profit earning capability would be able to sustain the investment period Xinyue Luo Yiming Xie Yutong Xiang Mijia Zuo

10. Position of Various Stakeholders Mitsui Real Estate Group (MREG): · critical of the long contract term · objected to 10% license fee · concerns about the risk-sharing on the part of WD. Industrial Bank of Japan (IBJ): · shifted its lending targets and willing to lend to OL. · total bank loans amounted to ￥195 billion (US $ 1.65 billion) · closely involved in companies’ internal affairs. Xinyue Luo Yiming Xie Yutong Xiang Mijia Zuo

11. · Position of Various Stakeholders Chiba prefecture (Landlord): · thought OL proposed an exaggerated request of land. · eventually granted 750,000 tsubo of land. · public welfare and consideration of employment. Stockholders at Tokyo Stock Exchange: · OL was listed on the Tokyo Stock Exchange In 1996 with its closing price on the first day of IPO being ￥8,850 a share, exceeding 9% of its offered price. · Later evaluation disappointing: stock price of ￥8,000 than initial ￥8,055 Xinyue Luo Yiming Xie Yutong Xiang Mijia Zuo

12. Financial Assumptions without the New Project Number of visitors: remain the same Admission fees: increase by 2% annually Operating costs: 67% of sales; Administrative: 7% of sales; Other Expenses: 4% of sales Tax Rate: 43% Xinyue Luo Yiming Xie Yutong Xiang Mijia Zuo

13. Financial Assumptions with the New Project Number of visitors: 30% increase in 2002, 10% increase in 2003 and 2004 Admission fees: 2% increase in the following four years; 15% in 2002; 10% 2003; same in 2004 Operating costs other than depreciation, administrative, other expenses, tax rate: same assumptions Xinyue Luo Yiming Xie Yutong Xiang Mijia Zuo

14. Depreciation Assumptions Depreciation Conducted using straight-line method over 20 years Xinyue Luo Yiming Xie Yutong Xiang Mijia Zuo

15. Difference in Interest Payment Xinyue Luo Yiming Xie Yutong Xiang Mijia Zuo

16. Projected Income and Cash Flow of the New Project Xinyue Luo Yiming Xie Yutong Xiang Mijia Zuo

17. Capital Budgeting Techniques • Net present value (American NPV) • Internal rate of return (American IRR) • Average accounting return (AAR) Xinyue Luo Yiming Xie Yutong Xiang Mijia Zuo

18. Net Present Value Xinyue Luo Yiming Xie Yutong Xiang Mijia Zuo

19. Net Present Value WACC=5.65% Xinyue Luo Yiming Xie Yutong Xiang Mijia Zuo

20. Terminal Value Terminal value represents all future cash flows in an asset valuation model. This allows models to reflect returns that will occur so far in the future that they are nearly impossible to forecast. Terminal value = Cash flow of the fifth year / discount rate Total value= the terminal value+the net operating cash flow(5th year) =4581.9 Xinyue Luo Yiming Xie Yutong Xiang Mijia Zuo

21. Initial Investment Xinyue Luo Yiming Xie Yutong Xiang Mijia Zuo

22. Net Present Value Together with the initial investment in 2000 and the terminal value, the net cash flow was presented in the table below. It was calculated by adding income after tax with depreciation. A five-year cash flow for the period 2000–2004 was projected, of which the summary was as follows: Yutong Xiang Xinyue Luo Yiming Xie Mijia Zuo

23. Net Present Value • IRR-----8.55% • NVP------446.04 $million Xinyue Luo Yiming Xie Yutong Xiang Mijia Zuo

24. Average Accounting Return We need 3 steps to calculate AAR: • step 1:Determining average net income • step 2:Determining average investment (book value) • step 3:Determining average accounting return Xinyue Luo Yiming Xie Yutong Xiang Mijia Zuo

25. Average Accounting Return Step 1: If we assume the project has a useful life of 20 years, based upon our income projection in the cash flow, the average net income over the next five years should be: Xinyue Luo Yiming Xie Yutong Xiang Mijia Zuo

26. Average Accounting Return Step 2: The average value of the total investment over the five years for OL is the average of the projected fixed assets (book value) of each of the five years: Xinyue Luo Yiming Xie Yutong Xiang Mijia Zuo

27. Average Accounting Return Step 3: ARR= Xinyue Luo Yiming Xie Yutong Xiang Mijia Zuo

28. Accept or Reject? • NPV - Yes 445.8 Million > 0 • IRR - Yes 8.55% > Hurdle Rate 5.65% • AAR - No -1.05% < 0 Xinyue Luo Yiming Xie Yutong Xiang Mijia Zuo

29. Different Decisions • NPV and IRR • Best approaches established in US • CFs are used • The time value of money is accounted • AAR • Common method used in Japan • No depreciation expense added • CFs after operating period are not accounted • No salvage value Xinyue Luo Yiming Xie Yutong Xiang Mijia Zuo

30. A Combined Method • ACFR = (average cash flow + BV of fixed assets at the end of project) / initial investment • Considers both cash flow and terminal value of the project • Result: ACFR = 19.1% > 0 accept project Xinyue Luo Yiming Xie Yutong Xiang Mijia Zuo

31. Difference in Corporate Governance • Maximizing shareholder wealth • Emphasis on short-term interests • Open to change • Maximizing stakeholder wealth • Emphasis on long-term interests • Adhere to traditional, not open to change American Japanese NPV AAR Xinyue Luo Yiming Xie Yutong Xiang Mijia Zuo

32. Effect on Metric Choice Japanese Anglo-American Maximize shareholders wealth Maximize return of each project Emphasis short-term interest Focus oncash flow of the project Maximize stakeholders wealth Maximize corporate net income Emphasis long-term interest Focus on net income of the company Use NPV Use NPV Use AAR Xinyue Luo Yiming Xie Yutong Xiang Mijia Zuo

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