Concepts in Action International Capital Budgeting at Disney The Walt Disney Company, one of the world's leading entertainment pro- ducers, had more than $36 billion in 2009 revenue through movies, televi- sion networks, branded products, and theme parks and resorts. Within its theme park business, Disney spends around $1 billion annually in capital investments for new theme parks, rides and attractions, and other park construction and improvements. This money is divided between its domes- tic properties and international parks in Paris, Hong Kong, and Tokyo. Years ago, Disney developed a robust capital budgeting approval process. Project approval relied heavily on projected returns on capital investment as measured by net present value (NPV) and internal rate of return (IRR) calculations. While this worked well for Disney's invest- ments in its domestic theme park business, the company experienced challenges when it considered building the DisneySea theme park near Tokyo, Japan. While capital budgeting in the United States relies on discounted cash flow analysis, Japanese firms frequently use the average accounting return (AAR) method instead. AAR is analogous to an accrual accounting rate of return (AARR) measure based on average investment. However, it focuses on the first few years of a project ( five years, in the case of DisneySea) and ignores terminal values. Disney discovered that the difference in capital budgeting techniques between U.S. and Japanese firms reflected the difference in corporate governance in the two countries. The use of NPV and IRR in the United States underlined the perspective of shareholder-value maximization. On the other hand, the preference for the simple accounting- based measure in Japan reflected the importance of achieving complete consensus among all parties affected by the investment decision. When the DisneySea project was evaluated, it was found to have a positive NPV, but a negative AAR. To account for the differences in philosophies and capital budgeting techniques, managers at Disney introduced a third calculation method called average cash flow return (ACFR). This hybrid method measured the average cash flow over the first five years, with the asset assumed to be sold for book value at the end of that period as a fraction of the ini- tial investment in the project. The resulting ratio was found to exceed the return on Japanese government bonds, and hence to yield a positive return for DisneySea. As a result, the DisneySea theme park was constructed next to Tokyo Disneyland and has since become a profitable addition to Disney's Japanese operations. Soimez: Miuwa, Minur, 2006. Tokyo Disneyland and the Disneysea Park: Corporate governance and differences in capital budgeting concepts and methods between American and Japanese companies. University of Hong Kong No. HKUSER, Hong Kong: University of Hong Kong Ash Che Research Center, and The Walt Disney Company. 2010. 2009 annual report. Burbank, CA: The Wah Disney Company