Corporate Governance and Differences in Capital Budgeting
Concepts and Methods Between American and Japanese
Companies
Alvaro Fernandez
Yizhen Liu
Daniel Mejia
Yitian Xue

• 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

• 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

• 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

• The number of visitors never went below 10 million per year. They reached a peak in 1998 with 17.45
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

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

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

The mitsui real estate group:
Owned 20.48% of OL’s shares.
Landlord: The Chiba government office perceived an exaggerated request for land from OL’s shareholders (Keisei electric railway co and IBJ). 1 million Tsubo (816.88 acres).
Problems for them:
1) Long period of time
2) Very high licensing fees
3) No risk sharing
Eventually OL got 750.000 Tsubo. (612.66 acres) later on, in 1988, the Chiba prefecture requested the use of unused park land of 300.000 Tsubo.
(245.06)
Fernandez Mejia Liu Xue

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 ($1.65
billion)
Fernandez Mejia Liu Xue

 Initial investment: ¥400 billion ($3.4 billion)
 Company’s total Assets: ¥355.18 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

• 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 –
Fernandez Mejia Liu Xue
OL’s top management strongly opposed to the licensing fee format for the second park.

• Initial investment of ¥400 billion (us$3.4 billion) in 2000
Number of visitors increase
Admission fees increase
Admission fees
1997 1998 1999 2000 2001 2002 2003 2004
0
0
$ 88.30
0.02
$
0
90.07
0
0.02
$ 91.87
0
0.02
$ 93.70
0
0.02
$ 95.58
These would be the proportional values of each years level of sales
$
0.3
0.15
109.92
$
0.1
0.1
120.91
$
0.1
0.1
133.00
US dollars
• 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%

• 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

• 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

Fernandez Mejia Liu Xue

Fernandez Mejia Liu Xue

• 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

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

Fernandez Mejia Liu Xue

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

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

• 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

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

• Firm’s objective
Maximizing shareholder wealth
• Principal-agent relationship
Positive/negative incentives to get agent on the same line
Anglo-American
• Value maximization
Short-term; meet market expectations
Japanese
• 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
Fernandez Mejia Liu Xue

or
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
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

Fernandez Mejia Liu Xue

• 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 240.9 million in 2004
• Tokyo Disney Sea Park can also create huge employment opportunity

• DisneySea Park was opened on September 4 th , 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