Chapter 8, Problem 8.8CP

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 International include the following note:

12. PROPERTY AND EQUIPMENT

We record property and equipment at cost, including interest and real estate taxes we incur during development and construction. Interest we capitalized as a cost of property and equipment totaled $33 million in 2014, $31 million in 2013, and $27 million in 2012. We capitalize the cost of improvements that extend the useful life of property and equipment when we incur them. These capitalized costs may include structural costs, equipment, fixtures, floor, and wall coverings.

Required:

1. 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)?
   1. a. Cash flows.
   2. b. Fixed asset turnover ratio.
2. 2. Normally, how would your answer to requirement (1b) affect your evaluation of Marriott’s effectiveness in utilizing fixed assets?
3. 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?