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basic earnings during the current 1962 fiscal year
approximately $ 1,500,000. The "Belt-Tightening"
program referred to above should, we believe,
more than compensate for any presently unforeseen contingencies. Recovery from the recent
recession, and anticipated improved earnings
from the Penn-Sheraton and Thompson Industries, Inc. should also contribute to a favorable
trend in fiscal 1962.
Ackn o wledgm ent
We would like to take this opportunity, as
we have done on many previous occasions, to
thank the 22,000 employees of Sheraton for their
material contribution to the Company's performance in this and past years. May we also
acknowledge with appreciation the support being
received in many ways from 18,000 Sheraton
shareholders. To all we are glad to report our
expectation that the present new fiscal year will
be one of substantial further progress.
Cnxc^S(^a>-«
FURTHER COMMENT
An Interesting Look at
Depreciation
A new ten million dollar building, normally
assigned a 50-year life, would require — if
straight line depreciation of 2% a year were used
— $200,000 each year for depreciation. In fifty
years the building, having then presumably
reached the end of its economic life, could in
theory be replaced by funded reserves which
would amount to the ten million dollars originally invested in the building.
However, the money set aside does not in
practice he idle. If reinvested at 4% after income
taxes compounded annually for fifty years, these
cash reserves, instead of the original $10,000,000,
could aggregate $30,533,000, a very generous sum
even after taking into account increased reproduction costs expected in an inflationary
economy.
Assuming the depreciation reserves are
earned, as they have been in Sheraton's past
twenty-four years' experience, and that these
reserves are not required for debt amortization
(on the theory that when property values are
maintained, debt amortization is customarily
replaced with new debt), and assuming that the
annual depreciation reserves can continue to be
readily invested and reinvested profitably during
the fifty-year life of a new property at a rate better
than 10% annually, — then the cash ultimately
realized from these reserves would amount to
more than $232,781,000. At a 15% rate, which
corresponds more closely to Sheraton's past
twenty-four-year actual experience, the amount
becomes much larger, taxing the capacity of
Company calculating machines. Utilizing one of
several available forms of accelerated depreciation calling for larger reserves in earlier years,
makes the figures resulting from this compounding process even more impressive.
As a further illustration, consider only the
first year's depreciation reserves of approximately
$800,000 actually taken on an accelerated basis
on the new Philadelphia Sheraton (building only)
in the year 1958. If this sum were invested in the
business, at a rate of only 10% after taxes compounded annually for fifty years, without the
benefit of setting aside any additional depreciation reserves during the remaining forty-nine
year life of the building, then the principal and
interest accumulated in fifty years would
amount to $93,912,000. This alone would be six
times the amount required. If providing funds
for replacing the building fifty years later was the
primary objective for setting up depreciation
reserves, the amount of $133,000 set aside once
for the first year only, would have been, if compounded annually, sufficient to attain this objective in fifty years. This amount of $133,000 would
be less than a single year's depreciation allowance
called for when using the straight line depreciation method.
The effective reinvestment of depreciation
reserves account in a large measure for the rise
of Sheraton's total assets during the twenty-four
years that the Company has operated hotels and
other real estate. The reinvestment of these
reserves and consequent increase in asset value
has broadened the credit base of the Company
permitting further growth through debt financing
up to the Company's stated objective of approximately 50% of total assets at estimated values, less
current liabilities. The Officers of the Company
believe that this program has been primarily
responsible for the increase in total assets during
this period from less than $1,000,000 to more
than $400,000,000 at estimated values.
The picture, of course, is not always as rosy
as suggested by these illustrations. They do not
tell the complete story. In practice a portion of
the depreciation reserves may be necessary for
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