Question

Norwegian Cruises is a company that owns and manages a large fleet of ships used primarily for cruises along Norwegian fjords. Following a spike in tourist arrivals in Norway, Kristofer, the company’s managing director decided to increase the company’s fleet by acquiring another rival business. With the short-term interest rate at 8%, Norwegian Cruises used $9 million of its retained earnings to acquire the assets and settle the debts of Fjords Unlimited, a local struggling business providing similar services. Kristofer’s acquisition was based on predicted additional annual sales of $2 million over the first five years. After close review of the acquisition, the board of directors qualified Kristofer’s performance as poor and decided to immediately terminate his employment and appoint Anngerd, the assistant manager, as the acting managing director. Do you know what motivated the termination of Kristofer’s employment? Answer Sheet: Please input your answer here. Utilize extra sheets of paper when needed.

Answer 1

Answer:

Explanation:

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Answer 2

The termination of Kristofer's employment was motivated by the fact that his decision to acquire Fjords Unlimited at the cost of $9 million in today's present value when the predicted revenue from the investment would yield $7,985,420.07 in present value terms.

• This implies that Kristofer made a poor investment that had cost Norwegian Cruises more than the expected cash inflows.  The investment was a loss-making one and could not have been authorized by the board of directors.

• If Kristofer had invested the $9 million at the short-term interest rate of 8% per year, his company would be richer by $5,544,000 {($9,000,000 x 1.616) - $9,000,000} after 5 years.

Thus, the acquisition investment in Fjords Umlimited by Kristofer was very poor.

Data and Calculations:

Short-term interest rate = 8%

Present value of cash outflow for the acquisition of Fjords Unlimited = $9 million

Predicted annual sales revenue from the acquisition = $2 million

From finance calculator:

N (# of periods) = 5 years

I/Y (Interest per year) = 8%

PMT (Periodic Payment) = $2,000,000

FV (Future Value) =  $0

PV (Present Value of Revenue) = $7,985,420.07

Sum of all cash receipts over 5 years = $10,000,000.00

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