1) Do capital budgeting analysis based on AAR method, NPV, IRR, ACFR, and payback. What decision would you make based on your analysis?

2) Why do you think OL undertook the project even though their decision was not supported by their own method? (Trick question, be careful)

Case:

Background

Japanese Oriental Land Corp (OL) successfully brought Tokyo Disneyland (1979-1983) licensed by Walt Disney Co

OL IPOed in 1996

Now in 1997, Walt Disney Company (WD) inquires to consider a DisneySea Park project

Japanese Oriental Land Corp (OL) Ownership Structure

Founder President Masatomo Takahashi

20.48% owned by Mitsui Real Estate Group (MREG)

President Azuma Tsuboi

Tokyo Disneyland was funded by 22 banks with Industrial Bank of Japan (IBJ) as its main bank

President Kisaburo Ikeura

Now, banks own 28.35% of OL shares, and send appoint OL president

Keisei Electric Railway Co (11.20%)

President Chiharu Kawasaki

One of OLs largest SH;

Chiba Prefecture

granted 750,000 tsubo (608 acres) of land

Other SHs listed in Exhibit 9

Japanese Oriental Land Corp (OL) Board Composition

consists of 28 directors from

Chiba Prefecture

Keisei Railroad Corp

Industrial Bank of Japan

Mitsui Trust Bank

National Policy Agency

OL officers (13)

See Exhibit 8 for the directors list

The Tokyo DisneySea Park project

Investment = 400 Bil. (=$3.4 Bil.)

A large investment compared to OLs assets of 355.18 Bil. (=$1.77 Bil.)

Financial projections

Exhibit 3: Depreciation schedule (1998-2004) 20-year straight line

Exhibit 4: Debt costs (1998-2004) 10-year loan

Exhibit 5: Financial data projection without DisneySea (1998-2004)

Exhibit 6: Financial data projection with DisneySea (1998-2004)

Exhibit 7: Income and CF from DisneySea (1998-2004)

Assumptions listed in Appendix 1

The Tokyo DisneySea Park Capital Budgeting Methods

1.NPV (Net Present Value)

Summation of the present values of after-tax CFs and terminal value

2.AAR (Average Accounting Return)

Average Net Income divided by Average Investment

3.ACFR (Average Cash Flow Return)

(Average CF plus Ending fixed assets) divided by initial investment

Appendix 2 explains the AAR, NPV and ACFR models