Water Blu is a water park situated in Bristol, UK. It is owned by Dohlar plc and is one of the world’s largest water parks. Water Blu attracts millions of visitors each year. The park provides an entire range of family entertainment. It has rides, shops, spas, fitness centres, hotels and restaurants. Encouraged by the success of Water Blu, Dohlar decided to set up a new water park in Northern China. Dohlar’s management is looking to tap the large potential customer base in China who would want to visit Water Blu but would not be ready to incur the high travel expenses to the UK. Since a water park the size of Water Blu required a substantial area of land, Dohlar set it up outside the main city of Jinan. This region receives frequent rainfall and the weather is not particularly warm. Because of these factors, Water Blu, China, could not replicate the success of Water Blu, UK.

Further strategic development

Now, Dohlar is considering a proposal to establish another Water Blu park. This time it is considering one of the South-east Asian countries to host the park. The new Water Blu will be modelled like the other two Water Blu parks, having shops, spas, fitness centres, hotels, restaurants and rides. The cost of capital for the whole project is expected to be 15 per cent.

Shareholder value

Dohlar’s main objective is to increase its shareholders’ wealth. Dohlar is aiming for a gross return on investment of 22 per cent after 10 years of income generation from its latest Water Blu park. The present value of the discounted cash flows from Water Blu, South East Asia, is $2,750 million, and the initial undiscounted capital outflow is $2,200 million.

Required
1. Calculate the return on investment for Water Blu, South-east Asia.
2. Explain the strategic information that Dohlar’s management would require in respect of customer demand, competition and setting up business in a new geographical location to plan its Water Blu park in South-east Asia.
3. As mentioned earlier, Dohlar’s main objective is to increase its shareholders’ wealth. The company is following a value-based management approach as opposed to a profit-planning model. Discuss the strong points of value-based management as compared to the profit-planning model.