Evaluating the Impact of Capitalized Interest on Cash Flows and Fixed Asset Turnover from an Analyst’s Perspective
You are a financial analyst charged with evaluating the asset efficiency of companies in the hotel industry. Recent financial statements for Marriott include the following note:
8. Property and Equipment We record property and equipment at cost, including interest and real estate taxes incurred during development and construction. Interest capitalized as a cost of property and equipment totaled $55 million in 2008, $49 million in 2007, and $32 million in 2006. We capitalize the cost of improvements that extend the useful life of property and equipment when incurred. |
Required:
1. Assume that Marriott followed this policy for a major construction project this year. How does Marriott’s policy affect the following (use + for increase, – for decrease, and NE for no effect)?
a. Cash flows.
b. Fixed asset turnover ratio.
2. Normally, how would your answer to requirement (1b) affect your evaluation of Marriott’s effectiveness in utilizing fixed assets?
3. If the fixed asset turnover ratio decreases due to interest capitalization, does this change indicate a real decrease in efficiency? Why or why not?
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