The 2015 income statement for Duffy’s Pest Control shows that depreciation expense was $193 million, EBIT was $496 million, and the tax rate was 35 percent. At the beginning of the year, the balance of gross fixed assets was $1,566 million and net operating working capital was $413 million. At the end of the year, gross fixed assets was $1,809 million. Duffy’s free cash flow for the year was $409 million.
Solution :-
Duffy's operating cash flow = EBIT(1-Tax) + Dep =
= $496(1-0.35) + $193 = $515.4
Duffy's free cash flow = operating cash flow - investment in operating capital
$409 = $515.4 - investment in operating capital
Investment in operating capital = 515.4 - 409 = $106.4
Investment in operating capital = ( Closing fixed assets - Opening fixed assets ) + ( Closing NOWC - Opening NOWC )
106.4 = ( 1809 - 1566 ) + ( Closing NOWC - 413 )
Therefore Closing NOWC = $276.4
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