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 (1 b ) 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?