DrStarlander
Well-Known Member
My understanding is that the entire cost -- say $300 million in your example -- is a capital expense and does not affect the company's net profits by that whole amount. Rather, it is depreciated over, say, 30 years, so in a straight-line depreciation (for simplicity's sake), it would affect the net profits $10 million per year. But that depreciation period would not begin until the asset is put into service (the project is complete).
I've written a lot in this thread about why Disney's projects may seem long or there may be periods of inactivity on site (due to phase buffers), but there is a tension because there's also pressure to complete projects efficiently. Projects that drag on tend to be more expensive and risky for many reasons, including potential for:
- Catastrophic disruption (economic, war, pandemic) exposing an incomplete project
- Labor costs going up
- Material costs going up
- Value of the dollar changing disadvantageously
- Extended equipment rental costs (cranes, construction trailers, etc.)
- Permit extension costs
- Increased borrowing costs
These two dynamics push in opposite directions and create a healthy tension. That's what drives the rational project schedule. For people who make construction project management their profession, this tension is their daily life at work.
Having said all that, there indeed may be some benefit to cash flow and debt related to the pace of projects. But I don't think the benefits of stretching out projects typically outweigh the expenses/risks and, again, the effects are not really around net profits. It would be easy to swamp the cost of the debt with rising project costs and risk with an over-extended project timeline. For example, say the cost of debt is 5%. It would likely be better to take on more debt -- if the company's balance sheet can handle it -- and finish the project efficiently, than fund the project from cash on hand only and incur the risk of 5% to 20% in increase in project costs due to all the possible impacts listed above.
But all this is the something an analyst should just ask the CFO in the next quarterly call, it's something shareholders may want to know and there shouldn't be anything secretive about it. It's just finance.
That calls into question the value of the project in the first place, right?
Sure, to be clear, I don't think they're actually stalling during the project. I was making up a fictional depiction of how some fans may think this plays out to show how implausible that is. ("Dragging their feet" suggests an active stalling during the project, that phrase doesn't really apply to a long project schedule determined up front.) I do agree, the projects have "long" timelines (for whatever that means, my city's light rail lines have decades-long project schedules) and specifically, Disney's timelines -- like any huge project -- include buffers at many phases, sometimes creating a sense of inactivity that drives fans nuts.
Agreed. There are many details and construction drawings finished while earlier stages of the project have begun. If it takes 18 months to get to pouring foundations, say, that's 18 more months they can use to finalize the design of show scenes or whatever, at no negative impact. Overall this fast-track approach reduces timelines, which is good for fans and Disney.
