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corp fin project sample 1

corp fin project sample 1 - FinalOO-B E Final Project 2009...

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Unformatted text preview: FinalOO-B E Final Project 2009 Project Evaluation: New imrestmenton H 011g Kong Disrmyland By the H 0 mg [(011 g (Qk'nr-‘erlmlent Abstract In our project, we are going to investigate whether the Hong Kong Government should continue investing in the Hong Kong Disneyland or not. We have three sections. Section 1 is to evaluate Hong Kong Disneyland project by using NPV with appropriate assumptions. We need to find out that Hong Kong government has to wait how long'to get back her initial expenditure. Section 2 is to compare the benefits fi'om different local investment projects. We are going to using Ocean Park and Ocean Park Hotels as comparisons. Similarly, we need to calculate the discounted ‘ paybaehpepio’di of investing in Ocean Park and also that of investing in Ocean Park Hotels. And we compare these projects, the shorter the discounted payback period, the greater the profitability of the projects. Section 3 focuses on the future challenges Hong Kong Disneyland may face. The Shanghai Disneyland is coming very soon. As the world's third largest Disneyland resort, Shanghai Disneyland wins Hong Kong Disneyland in many aspects. Can Hong Kong Disneyland beats Shanghai Disneyland to maintain or even increase her attractiveness in the future? All in all, we make a conclusion that whether Hong Kong Disneylandris‘afi‘aporopriate investment project for Hong Kong government. wjvliov‘hm iaiaik 1}ng (Md? 7pRV va/ac‘a 06mm Introduction Bat/(gm u n d In December 1999, Hong Kong Government and Walt Disney Company set up a joint venture company to establish Hong Kong Disneyland. Since then, Hong Kong Government had invested 23 billion HKD While the Walt Disneyland Company had invested 2.45 billion HKD with the shareholding ratio is 57:43. Since 12th September, 2005, Hong Kong Disneyland is opened as the filth Disneyland in the world. In the following 3 years, the Hong Kong Disneyland recorded losses and the unsatisfactory attendance. Besides, Hong Kong Disneyland with the size of 126 hectares is the second smallest Disneyland. Nevertheless, the scope seems to be the smallest one in the world. Now, a new Disneyland may be built in Shanghai in the near future with a high chance. The Shanghai Disneyland is expected to be 800 hectares large and will open to public in 2014 at the earliest. Above conditions are disadvantageous to Hong Kong Government. One question has popped up: Should the government continue investing in Hong Kong Disneyland? Section 1: Evaluation the Hong Kong Disneyland project Met/10d010gy To justify whether the Hong Kong Disneyland project is worth investing, Net Present Values (NPV) of each discounted payback period of the project are estimated in Hong Kong Dollars with appropriate assumptions for the ease of calculation. NPV is equal to the difference between the investment cost and the sum of discounted project cash flow, i.e. NPV = —C0st + CF Investment Discounted . '3 / It is assumed that there would not be any further investment cost afier 2008 for the ease of computationi. Besides, the cash flow (CF) of the each year is given by, CF = OCF — ANWC - Spending Cam, where OCF = Operating Cash flow (OCF), ANWC = Change in Net Working Capital (NW C), Spending mm, = Capital Spending. As OCF is the major component of CF, It is assumed that there is no change in NWC and capital spending. By Top-Down Approach, OCF is given by: OCF = REVENUE — Cost - Taxes This formula is used for estimating the OCF of the years which the Hong Kong Disneyland is in {A4 operationfi..Eer—the fixture discount rate, i.e. the discount rate fi'om 2008 onward, it is assumed to be the..-~""‘ average interest rate of Hong Kong fiom 1999 to 2008iii mum is 4.372;?» Linear growth model is adopted for the future OCF estimation, i.e. 0013,08,, = OCFM + t(0c1rm _ ocpm) where 2008+t indicates the specific year, for example, when t =1, the formula gives‘t'he estimated OCF of 2009. Due to the poor management in 2007, there attendance has been much lower than expected. Therefore, the government has urged the management company to have improvements in operational efficiency and devise cost-effective marketing strategies last year. Writ-slam strategy is effective and back to the normal track. Therefore, we neglect the data of 2007 to calculate the NPV and growth rate. Besides, the PV of the OCF is given by: OCFZmH = PERM)?“ + r T Then, the NPV of each discounted payback period of the project, NPV = —Costhm‘ + Z OCFW 2008+! i=1 The investment decision criterion is to reject the project if NPV is negative with a prescribed payback period, T. Raw/r Data Table" The OCF growth (in M HKD) 39.165 The rate = average rate of 1999 to 2008 4.87222222 NPV at 1999 -3347.4278 OCF at 2008 -400.635 OCF at 2006 -439.8 Discount rate from 2008 back to 1999 xr’TTE'fiE ._ From the Data Table and Table 1", we can see that ‘scounted payback period = .years‘itrom now. HE ____.—-"'_'_'__d-F'— . The government should not invest in this project as the discounted payback period is comparable with the infi'astructure project. We advise the government against investing further unless the new investment can shorten the payback period. Section 2: Evaluation and Comparison of different investment projects Ocean Park In 1999, Hong Kong Government had invested 23 billion to Hong Kong Disneyland. Therefore, we chose its one and only one competitor, Ocean Park, as a comparison. From Table 2“, Average CF between 2002 and 2008 = (339.5m + 329.1m + 336.6m + 373m + 426.1m - 138.3m - 267.5m) / 7 = 1398.5m / 7 = 199.7857rn "“____r"" Assuming HK Government can receive $199.7857m each year in the filture infinitely and HK Government invests $23000m to Ocean Park instead of Disneyland. Then, 1997857111 NPV = -—23000m +—-— = —18899.4951 < 0 4.872222% Therefore, even Hong Kong Government can wait a lot of years; the PV of the future cash flows is still less than her investment. Therefore, compared with the investment to Disneyland, Ocean Park is not a good investment. Ocean Park Hotels In 2008, the Ocean Park decided to invest nearly 5500m on developing the 35 new facilities. Besides, they also plan to build three hotels to diversify the Hong Kong’s Tourism Market and develop the under- served markets. Since the report did not list out the cost of three hotels, similar building plan had been used to estimate, the cost of two four-class hotel and five-class hotel is 600m each. With reference to the information of the Hong Kong and Shanghai Hotel limited, we will calculate the NPV of the building plan by adjusting the information used because of different market consideration. As the annual report had not provided the full financial statement of the Peninsula Hong Kong, assume that the hotel’s depreciation cost of inventories, assets etc., are proportional to the amount of business invested on Hong Kong at hotel sector. From Table 3"ii, Average CF =(-1351.23+373.6-227.78+1914.35+306.47+252.88+14l.41 )m / 7 = 1409.7m / 7 = 201.39m Assume HK Government will receive average CF of the Peninsula every year in the future and the government invests 1800m to the hotels of Ocean Park instead of Disneyland. So, 1 _ {—1._):n _ , 1 + £8?2222% 1800131 + 210.3912: ( 4.8?2222% > 0 n>11.3364 Therefore, the discount payback period is within 12 years, i.e. the government can recover faster than Disneyland project. Section 3: Future Challenge of Hong Kong Disneyland When investigating whether the project is worth to invest or not, we need to consider the risk of this project. In this section, the challenges faced by Hong Kong Disneyland will be presented. We will focus on its potential competitor and the prosperity of the industry (i.e. the future theme park attractiveness). Future Competitor There is a high chance that another Disneyland will be servicing visitors in Shanghai. Thousands construction workers and engineers will be working days and nights to start building up the world's third largest Disneyland resort, which is approximately 8 times larger than Hone Kong Disneyland‘fifi. Since both Hong Kong Disneyland and Shanghai Disneyland are targeting mainlanders, it is foreseeable that Shanghai Disneyland will be a potential competitor of Hong Kong Disneyland. Shanghai, compares with Hong Kong, should be much more convenient for mainland visitors, as they do not need to apply for special travel permit under the Individual Visit Scheme. Also, as stated before, Shanghai Disneyland would be the world‘s third largest Disneyland. With everything being similar, like the infi‘astructure and airport familiarities, it would be economically logical and reasonable for visitors to choose Shanghai Disneyland over Hong Kong Disneyland, because it is expected to have more rides and attractions inside. Therefore, undoubtedly, many of Hong Kong Disneyland's visitors would switch to Shanghai Disneyland. Future of'the theme park industry: the Theme Park Attractiveness To find out whether a theme park is attractive, we focus on the attendance of the theme parks in the world. The overall attendance of the theme parks in the world, and the factors affecting the attendance are shown. The sums of the attendance of the top 25 theme parks in the world are 186 millionix, 187 million‘, and 185 millionXi in year 2006, 2007 and 2008 respectively. It shows that the attractiveness of the theme park industry is quite stable in recent year as there is no significant increase or decrease in attendance. There are some factors affecting the attendance of a theme park. Safe facilities and accidents in theme park is a factor that decreases the attendance. Take LotteWorld in Korea as an example, there was a tragedy occurred in 2006 and this news leads to a dramatic decrease in attendance in LotteWorld. Also, the development of new ride will affect the attendance in a positive way. For example, Ocean Park has established a brand new exhibit ‘Amazing Asian Animals’. It was estimated that there will be an increase of 250000Xii in attendance. Usually, a new zone will increase 5% in attendanceXiili xiv. To sum up, the future of the whdlq‘rndustry is still optimistic but .the-m'jcroenvironment of Hong Kong Disneyland is not good as it will face a strong competitor in the future. Therefore, the risk of investing in Hong Kong Disneyland is still relatively high as the future of the Hong Kong Disneyland is challenging. Conclusion Based on our NPV calculations, since the payback period of investing in developing Ocean Park Hotels (12 years) is shorter than that in Hong Kong Disneyland (57 years). Besides, Hong Kong Disneyland may have a head-on competition with Shanghai Disneyland. Therefore, Hong Kong government is advised investing in Ocean Park Hotels Project instead of Hong Kong Disneyland. Appendix Table l: NPV Evaluation 10 11 12 13 14 15 l6 1‘7 18 19 20 21 22 23 24 25 26 NPV of 2008+t -3561.929548 -3 744304505 -3897.074801 -4022.59758 -4123.074868 4200562896 4256980893 -4294.1 19379 4313.647981 —43 1 7.122803 -4305.993367 -4281.609161 4245225806 -4198.010861 -414l.049297 -4075.348655 4400134389 -3921.401951 -3834.826074 -3742.859835 -3646. 190956 -3 545 .454896 6441238216 -3334.081757 -3224.483615 -3112.901953 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 5'4 55 56 57 58' 59 60 61 NW of 2008+t 4965062295 -1852.82487 -174l.804061 -1632.129076 4523914494 -]417.26l34 -1312.258103 -1208.981677 -1 107498252 -1007.864139 9104265466 -814.3243074 4204885505 -628.643336 6388062436 4509889235 3651976087 -281.4335938 49969368., 4199705902 4225335443 3347233105 1072237703 179.0209582 248.8862929 316.8443095 27 28 29 30 31 32 33 34 35 Table 2: Ocean Park Data Table HK$ million \ Year OCF NWC NCS CF Average interest rate for 10 years (%) Table 3: Peninsula Hong Kong Data Table HK$ million \ Year OCF NWC NCS CF Average interest rate for 10 years (%) 4999.757632 62 -2885.436688 63 4770.292661 64 4654.648782 65 -2538.800022 4423.015025 4307537915 4192.589995 —2078.37134l 2002 2003 2004 442.4 412.7 520.6 (36.6) (43.6) (160.1) (66.3) (40.0) (23.9) 339.5 329.1 336.6 4.872222 4.872222 4.872222 2002 2003 2004 458.17 243.42 332.88 (19.96) (140.04) 202.56 1829.36 9.86 393.6 (1351.23) 373.6 (227.78) 4.872222 4.872222 4.872222 382.9214331 447.1457501 5095467971 5701553652 2005 2006 590.3 685.3 (194.8) (147.5) (22.5) (111.7) 373 426.1 4.872222 4.872222 2005 2006 408.89 453.88 177.77 (32.33) (1683.23) 179.74 1914.35 306.47 4.872222 4.872222 2' 2007 791.5 (359.2) (570.6) (138.3) 4.872222 2007 500.95 135.13 112.94 252.88 4.872222 2008 864.3 (309.7) (804.1) (267.5) 4.872222 2008 507.36 112.86 253.09 141.41 4.872222 Reference and Remark ‘ http://www.legco.gov.hk/y199-00/chinese/hc/papers/brief—c.pdf ii http ://corporate.disney. go.com/investors/armual_reports.hun1 m http://www.tmdingeconomics.com/Economics/Interest-Rate.aspx?Symbol=I-IKD i" Generated fiom the sources and equations in methodology " See Appendix, Table 1 Vi http://www.oceanpark.com.hk/html/en/footer/corporatainfonnation/ar.html Vii http:l/www.hshgroup.com/annualReports.asp?rtid=98&id=165&tc_id=41 8 ; http://www.hshgroup.com/annualReports.asp?rfid=98&id=210 ““ http:I/www.nownews.com/2009/03l27l 162-2428324.htm k http:llwww.themeit.corn/attendance_report2006.pdf ' http:l/www.themeit.com/attendance__report2007.pdf xi http://www.themeit.coml’I‘EAERA2008.pdf ”ii http :l/wwa .881 903.com/appslnewsBoss/html/news1200904 13/200904] 308060274000.htm "r'i http://www.themeit.oom/attendance_report2006.pdf "i" http:l/www.themeit.com/attendance_repon2007.pdf ' i 11 “*“......__...:""""‘ ...
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