TOKYO DISNEYLAND AND THE DISNEYSEA PARK:

CORPORATE GOVERNANCE AND DIFFERENCES IN CAPITAL

BUDGETING CONCEPTS AND METHODS BETWEEN
AMERICAN AND JAPANESE COMPANIES

Pembimbing :

Dr. Alexander Suwinto Johan, SE, MM

Kelompok 1 :

Angelica Joanna Charity Kamalo (117221041)

Arya Adi Bramasta (117221042)
Debora Eunike (117221044)
Michelle Ruth Natalie (117221049)
Background

Oriental Land Corp. (OL) is a company based in Japan. Oriental

Land Corp. was founded on July 11, 1960. It had $ 0.53 billion
of paid - in capital and $ 1.53 billion of
annual sales revenue. This is the company that brought Walt
Disney to Japan.
Problems
The company entered into license agreement with the US based company Walt Disney
Company (WD), which involved the design, construction and operation of Tokyo
Disneyland in Japan in the April of 1979. The negotiation it went through with WD was
a tough one, since WD’s terms and conditions in respect of the deal were quite lopsided.

The initial condition made by Walt Disney was that they would be receiving 10%
royalty in the admission fees and sales of food and beverage items. However, finally a
deal was made between Oriental Land Corp. and Walt Disney Company, which
stipulated a license fee of 10% on admission fees and 5% on sale of foods, beverages
and novelty goods.
The financial position of WD was weak at the time of negotiations.
Every year, Disneyland and Walt Disney World attracted about 10
million entrants, and WD was unable to increase income by raising the
entrance fee.

The division of production of film and television was also doing poorly.
Under such contexts, extracting a fixed payment from their offshore
partner, irrespective of the success of the theme park, seemed to be an
attractive option for WD.
Tokyo Disneyland became a tremendous hit. It drew 10.3 million
visitors in accordance with the expectations of WD for the first year.
Average admission fee per person never dropped below 10 million after
the opening year, and Average admission fee per person peaked at 17.45
million in 1998. The theory that earlier enthusiasm would eventually
wear off had been proven wrong.
According to OL's 1988 visitor analysis, the percentage of repeat
customers seemed to be 75 percent which was far above 50 percent of
US Disney.

Visitors spent an average of 7,000 yen ($ 59.31) on admission fees, food,

beverages and novelty goods exceeding the original estimate of 5,000
yen ($ 42.37), causing overall sales of 80 billion yen ($ 0.088 billion).
Walt Disney wished to maximize revenue from Japan through license fees and to that effect, the
company proposed Oriental Land Corp. to consider the idea of constructing a new entertainment
park, the DisneySea Park project. The conditions were quite similar to the previous project. WD
would receive a license fee for letting OL use the “Disney” name and would provide OL with
valuable technical advice and management support for the new project. OL’s management was
having a rough time deciding on the project as they could hardly agree with the terms and
conditions stipulated by WD.
They believed it was unfair for WD to receive such a high royalty and assume no risk by
avoiding any financial burden. So, to overcome such a deadlock in negotiations OL asked its
senior executives and planning division to analyze the financial prospects of the project. The top
management wanted to get the idea of how long it might take the project to begin generating
profits.
SWOT ANALYSIS: S
● Continuous technical and management support are coming from Walt Disney.
● Orient Land Corp and Walt Disney brand have merged together to produce a
greater synergistic effect.
● Around 2493 full time employees and 6355 part time employees are working in
OL.
● High liner brand.

(Next slide)
SWOT ANALYSIS: S
●The Industrial Bank of Japan and Mitsui Trust Bank was the second largest partner.
●OL got 750000 tsubo which is 10 times larger than the Disneyland in Los Angeles.
●Highly profitable business.
●The main strengths in internal resources refer to human resources and financial
stability.
SWOT ANALYSIS: W

● Customer would get bored with the existing attraction and facilities.
● WD’s position in the Tokyo Disneyland contract-take no risk, just collect the
fee.
● High overhead expenses.
SWOT ANALYSIS: O

● High demand (Most of the customers were repeat visitors).

● OL has the opportunity of being the market leader in this industry.
● The future of Japanese industries would shift toward the service industries.
SWOT ANALYSIS: T

●There is a chance of demand fall. Management is estimating a steady

fall in demand after four years
●Charged higher licensing fee by the Walt Disney
●The effects of an economic depression could make it too expensive for
people to utilize the services and the products offered.
Summary of Problem Statement
A summary of the problem statement can be drawn up based on the case
synopsis as stated below:

●Should Oriental Land Corp. under take the “DisneySea Park” project under the
prevalent weak economic conditions Japan in that period?

●Whether the current profitability and earnings capacity of the company could sustain
the investment period?
●Does DisneySea Park create any non-financial benefits?

●Are there any other real options?

Forecasting up to 2004

We have determined the net cash flows. Finally, we have

calculated the NPV, IRR and
MIRR of for the project up to 2004 as per the 7-year projections
of Oriental Land Corp.

(Next slide)
Assumptions

The planning department of OL calculated a sensitive seven -

year projection. Future earnings and expenditure were estimated
for up to seven years based on historical data from 1996 to
1997. There have been the following financial assumptions:
1. In 2000, an initial investment of ¥400 billion (US$ 3.4 billion) in Tokyo
Disney Sea Park will be made

2. With the opening of Tokyo Disney Sea Park, Average admission fee per
person will remain the same over the next four years and will increase by
30% in 2002. In 2003 and 2004, they will increase by 10%. The average
admission fee per person in 1997 was ¥10,421 (US$ 88.30). In view of the
deflationary climate, admission fees will increase by 2% annually over the
four years after 1997 and by 15% in 2002 at the opening of Tokyo Disney
Sea Park and by 10% in 2003. Entrance fees will remain at the same rate as
in 2003 in 2004.
3. If the new project is not undertaken, Average admission fee per person will
remain the same during the seven-year period and administrative fees will
increase by 2% annually over those seven years.

4. Opening cost other than depreciation (67% of sales, the ratio of 1997 data),
administrative expense (7%) and other expenses (4%) will increase
proportionately with the increase in sales. These projections will be applied
despite OL’s decision to invite or not.

5. Depreciation of the ¥400 billion (US$3.4 billion) investment in 2000 will be

conducted using the straight-line method over 20 years.
6. Funds borrowed as of 1997 totaled ¥23 billion (US$195 billion), for which interest payments in
1997 were ¥1 billion (US$8.5 million) (the debt interest rate is 4.34%). It was assumed that the
cost of future borrowing would be 4.34% (the same as that in 1997). It was also assumed that for
future investments, two-third would be financed by the internal holding reserves and capital
increases (including the issuance of preferred stocks) and the one- third would be financed by
borrowings. This assumption was made based on the past performance of the company.

7. The Japanese rate of taxation was 43%.

8. The Weighted Average cost of capital is assumed to 5.65%. No country risk premium is added
as Japan’s country risk is very low.
Results

➔ The estimated net present value of the project is US $463.59 million.

➔ The IRR is 7% and MIRR is 7%.

Based on the projections we took on the basis of the seven-year projection of
senior executives of Oriental Land Corp, the NPV that we get is positive and
amounts to $463.59 million. The IRR is 7% and MIRR is also 7%.

S0, based on the result, we conclude that the project should be undertaken as
the project managed to scored a positive NPV. Besides the IRR=7% is also
higher than the hurdle rate of 5.65%.
Forecasting up to 2016

We have also forecasted the total revenues for the project up to 2016 since the
depreciation of the investment has been conducted using 20-year straight line
method.

Then we have assumed various components like number of visitors, average

admission fee per person and debt principal repayment rate, Interest rates tax rate
are remained unchanged. Then we have determined the net cash flows. Finally, we
have calculated the NPV, IRR and MIRR of the project.
Assumptions
Average admission fee per person has been assumed to increase due to fluctuations
in the rate of inflation. Due to deflationary effect Average admission fee per person is
assumed to increase by 10% in 2005.
In the following year it is assumed to rise by 2% and will remain same during 2007.
It will rise again by 5% in 2008. Again, due to deflationary effect it will rise by 10%
in 2010, 2011 and 2012. In 2013 there will be no growth in average admission fee.

In the next two years the average admission fee per person will rise by 2% due to
rising inflation and in 2016 due to deflationary effect it is assumed to increase by
10%.
1. The number of visitors has also been projected up to 2016. It is assumed to
increase by 10% during the years 2005-2007 and will remain constant up to 2016. •

2. The assumption regarding debt principal payment is that, principal payment rate
will be 5% each year of the outstanding borrowings.

3. The Weighted Average cost of capital is assumed to 5.65%. No country risk

premium is added as Japan’s country risk is very low.

4. The Japanese rate of taxation was 43%.

Number of Visitors
Average Admission Fee
Per Person
Results

The estimated net present value of the project is US $1,356.82 million

The IRR is 13% and MIRR is 11%.
On the basis of the projections that we made up to the year 2016, the NPV of the new
project with projections up to 2016 comes out as positive and the value amounts to
$1356.82 million. The IRR for the new project is 13% and the MIRR is 11%.

From this result, we can conclude that the project should be given a go ahead.
Although the Japanese economy was going through a slightly weaker condition during
1997, the project had shown very good prospects for Oriental Land Corp.
Conclusion
Japan is a country full of resources which need to be explored. The moderate
risk level of the country makes it even more suitable to be explored.

The expected result shows that the new project Tokyo DisneySea park has a
positive NPV and adds value to Oriental Land Corporation. That is why
Oriental Land’s cor. should start the project immediately to increase the total
revenue of the company.
THANKYOU
Notes