Assignment 4 Solution

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New York University ACCT-UB 0003 Fixed asset analysis: • Calculate Target’s PP&E turnover for the past 2 years. Has it increased or decreased? What does this imply? PP&E Turnover decreased from 2.88 times in 2015 to 2.79 times in 2016. This implies that the company is using its fixed assets less efficiently. Put another way, the company is gener ...[Show More]

New York University
ACCT-UB 0003
Fixed asset analysis:

• Calculate Target’s PP&E turnover for the past 2 years. Has it increased or decreased?

What does this imply?

PP&E Turnover decreased from 2.88 times in 2015 to 2.79 times in 2016. This implies that the company is using its fixed assets less efficiently. Put another way, the company is generating fewer dollars of sales per dollar of fixed assets.

• Calculate the percent used up of the company’s depreciable assets. What does this

information tell you about future capital expenditures? How has this ratio changed

over the last 3 years? Interpret the change.

The company’s assets were 49% used up in 2016, an increase from 2015’s percentage of 46%. Because the assets are (slightly) less than half used up, the company is in a growth phase. We do not expect the company to invest heavily in PP&E over the coming years. The assets are more used up in 2016 than they were in 2014, indicating the company has slowed investment in PP&E since 2014 (you can see this in the investing section of the statement of cash flows as well).

• Calculate the estimated useful life of the company’s depreciable assets. (Hint: Target

aggregates depreciation and amortization on the income statement but discloses

amortization expense in the Goodwill and Intangible Asset footnote). What does this

life imply about the mix of the company’s assets? What does the change in the

average life over the 3-year period imply about the change in the mix of assets?

The estimated useful life of the company’s assets has decreased from 16.4 years in 2014 to 15.7 years in 2016. This range of useful lives implies that the company is shifting toward shorter-lived assets (like fixtures, equipment, computer hardware, and software, whose useful lives range from 2-15 years) than longer-lived assets (like buildings, whose useful life ranges from 8-39 years). This observation is consistent with the fact that the percentage of the company’s depreciable asset cost that comes from buildings and improvements fell from 77.3% in 2015 to 77.2% in 2016.

2. Leases:

• Use the lease footnote to calculate the interest rate implied by the company’s capital

leases (ignore rent income). (Hint: Create the