Question

The 2015 income statement for Duffy's Pest Control shows that depreciation expense was $196 million, EBIT was $502 million, and the tax rate was 35 percent. At the beginning of the year, the balance of gross fixed assets was $1,572 million and net operating working capital was $416 million. At the end of the year, gross fixed assets was $1,818 million. Duffy's free cash flow for the year was $415 million. Calculate the end-of-year balance for net operating working capital.

Answer 1

$278.3m

Step-by-step explanation:

Duffy’s Pest Control’s operating cash flow was:

OCF = EBIT(1 – Tax rate) + Depreciation

Hence:

= ($502m(1 – 0.35) + $196m)

=$502m×0.65+$196m

=$326.3+196m

= $522.3m

Duffy’s Pest Control’s free cash flow for 2015 was

FCF = Operating cash flow – Investment in operating capital

$415m = $522.3m – Investment in operating capital

Investment in operating capital = $522.3m – $415m = $107.3m

Investment in operating capital for 2015 was:

IOC = Gross fixed assets + Net operating working capital$107.3m

= ($1,818m - $1,572m) + (Ending net operating working capital – $416m)

Ending net operating working capital = $107.3m – ($1,818m – $1,572m) + $416m

=$107.3-$245m+$416m

= $278.3m

Therefore the end-of-year balance for net operating working capital will be $278.3m