Walt Disney Co., riding high on its resounding success in creating resorts in Tokyo and Orlando, had long planned to enter the European market. Plans to build a Disney park in Europe were first discussed in the 1970's, yet construction did not begin until the 1980's at the location just outside of Paris and it was first opened in 1992. In considering where to locate a European theme park, Disney had much to consider. While some have argued that a theme park in Spain would have more easily transitioned from the red ink to profitability, Disney stood by its decision.
Overall project costs were significantly higher in France. The initial investment for a theme park in Spain was estimated at $1.4 billion, opening a theme park near Paris was expected to cost $2.4 billion. Additionally, while the government in Spain was motivated to offer financial assistance by an unemployment rate of 16%, France was unwilling to provide any aide for the project. The team assigned to evaluate the expansion looked at both qualitative and quantitative factors to make their final decision recommendation. Major contributing factors that were considered largely included culture, weather, cash flow/ net present value, and potential risks. In the end, Disney went with France based on a higher net present value (NPV) calculation. The results of this decision were initially mixed due to the fact that the organization had hoped for a near 100% occupancy rate which failed to materialize. Sensitivity analysis had accounted for this possibility, however the actual occupancy rate fell on the lower end of estimates.
It is very challenging and critical for organizations to accurately estimate cash flows for proposed business ventures. If an MNC is unsure of the estimated cash flows of a proposed project, it needs to incorporate an adjustment for this risk. The accuracy of this calculation may determine whether or not a project succeeds or fails. In order to account for variation MNCs have utilized a number of techniques.
International managers have several tools available to estimate cash flows including the risk-adjusted discount rate, sensitivity analyses, and simulation. The challenge is to understand how the many variables might impact cash flows. Variables that must be considered for variation include: exchange rates, inflation, financing, blocked funds, salvage value, prevailing cash flows, government incentives, and real options. While the risk-adjusted discount rate may be useful for smaller and less risky endeavors, it often fails to account for the diversity and variety of fluctuations of variables. Similarly, sensitivity analyses can be useful, but largely fails to truly prepare MNCs for potential eventualities.
By utilizing simulation methodology, MNCs can calculate a wide-range of potential variables to evaluate. Computer models can utilize the inputted range of each variable and randomly select value’s to determine the net present value (NPV). The computer randomly generates results that give management a perspective on the maximum and minimum possible rate of return based on estimations and chance. The major advantage of simulation is that the MNC can examine the range of possible NPVs that may occur.
Overall project costs were significantly higher in France. The initial investment for a theme park in Spain was estimated at $1.4 billion, opening a theme park near Paris was expected to cost $2.4 billion. Additionally, while the government in Spain was motivated to offer financial assistance by an unemployment rate of 16%, France was unwilling to provide any aide for the project. The team assigned to evaluate the expansion looked at both qualitative and quantitative factors to make their final decision recommendation. Major contributing factors that were considered largely included culture, weather, cash flow/ net present value, and potential risks. In the end, Disney went with France based on a higher net present value (NPV) calculation. The results of this decision were initially mixed due to the fact that the organization had hoped for a near 100% occupancy rate which failed to materialize. Sensitivity analysis had accounted for this possibility, however the actual occupancy rate fell on the lower end of estimates.
It is very challenging and critical for organizations to accurately estimate cash flows for proposed business ventures. If an MNC is unsure of the estimated cash flows of a proposed project, it needs to incorporate an adjustment for this risk. The accuracy of this calculation may determine whether or not a project succeeds or fails. In order to account for variation MNCs have utilized a number of techniques.
International managers have several tools available to estimate cash flows including the risk-adjusted discount rate, sensitivity analyses, and simulation. The challenge is to understand how the many variables might impact cash flows. Variables that must be considered for variation include: exchange rates, inflation, financing, blocked funds, salvage value, prevailing cash flows, government incentives, and real options. While the risk-adjusted discount rate may be useful for smaller and less risky endeavors, it often fails to account for the diversity and variety of fluctuations of variables. Similarly, sensitivity analyses can be useful, but largely fails to truly prepare MNCs for potential eventualities.
By utilizing simulation methodology, MNCs can calculate a wide-range of potential variables to evaluate. Computer models can utilize the inputted range of each variable and randomly select value’s to determine the net present value (NPV). The computer randomly generates results that give management a perspective on the maximum and minimum possible rate of return based on estimations and chance. The major advantage of simulation is that the MNC can examine the range of possible NPVs that may occur.
Photo Credit: E-Global.es
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