1. Explain the differences between the Japanese and American investment decision-making processes and the conflicts that arise from there.
When comparing the decision-making between the Japanese and the American firms, there are two main differences between them.
The main concern of the American firms in their decision-making process is the shareholder’s profit. For a Japanese firm, their main concern is corporate wealth for the benefit of all stakeholders.
Another difference is their Capital Budgeting Technique. Japanese use the Average Accounting Return (AAR) formula, which is easy to understand, and is the conventional method of evaluating capital investments in Japan. However, it does not consider the value of timing, ignores cash flows and does not pay attention to salvage value. On the other side, the American’s capital budgeting technique is to use Net Present Value (NPV) and Internal Rate of Return (IRR), which considers the NPV rule on investments, but it is more difficult to understand.
When both parties met to discuss the new project, each party had a different philosophy on how the project would be funded. The conflict that these two different philosophies created was that WD did not understand at the time that the terms they were offering, which seemed to only benefit WD, were a new concept in Japan. As WD was a strong negotiator, they unknowingly insulted the Japanese investors, which in turn caused them to mistrust the WD company.
The major terms of the DisneySea Park Project were that OL would pay WD a licensing fee for the use of the “Disney” name, and offer the land and money for the investment. In return, WD would offer technical advice and management support for the project.
The executives of Japanese Oriental Land Corp. (OL) had a number of stakeholders to please. Their parent company, the main bank, landlords, shareholders and OL’s board of directors. The Japanese wanted to find a fair investment that would benefit everyone. This is clear as OL’s management felt a social responsibility to help people who were affected by the land that was taken for this project from the sea, which affected fishermen, their jobs and their way of life.
From the information given in the case study, it is clear that WD was a tough negotiator from the beginning. They wished to maximize their revenue through license fees, admission fees, and sales on food, beverages and novelty goods without investing any money. WD was only interested in maximizing their shareholder’s profit in order to ensure the company’s growth. Although the Japanese had the same purpose, they were the ones who had the biggest risk in this investment as they were offering the land and the money for this project.
0. Calculate the following values, and please show your work:
a. the new project valuation using the Japanese capital budgeting technique (average accounting return method)
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b. the terminal value for DisneySea Park to be used for the American method
The terminal value is found by dividing the cash flow from the fifth year by the discount rate. By using Exhibit 7, you can find the anticipated cash flow with the new project.
5th year cash flowdiscount rate= 244.7 million 0.0565=4330.97 million USD
c. NPV for the Tokyo DisneySea Park using data from Exhibit 7
d. capital budgeting using the average cash flow return (ACFR) method
0. Why do you think that OL made the major investment to undertake this project in 1997, even though the decision could not be supported by its own capital budgeting method, meaning the AAR method?
claudiamk
Answerd12a2b.docx
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