Question

# The 2021 income statement for Duffy’s Pest Control shows that depreciation expense was \$207 million, EBIT...

The 2021 income statement for Duffy’s Pest Control shows that depreciation expense was \$207 million, EBIT was \$524 million, and the tax rate was 35 percent. At the beginning of the year, the balance of gross fixed assets was \$1,594 million and net operating working capital was \$427 million. At the end of the year, gross fixed assets was \$1,851 million. Duffy’s free cash flow for the year was \$437 million.

Calculate the end-of-year balance for net operating working capital.

Operating cash flow = EBIT(1 - Tax rate) + Depreciation

Operating cash flow = \$524 million(1 – 0.35) + \$207 million

Operating cash flow = \$547.6 million

Investment in operating capital = Operating cash flow - Free cash flow

Investment in operating capital = \$547.6 million - \$437 million

Investment in operating capital = \$110.6 million

Investment in operating capital = ΔGross fixed assets + ΔNet operating working capital

\$110.6 million = (\$1,851 million - \$1,594 million) + (Ending net operating working capital – \$427 million)

Ending net operating working capital = \$110.6 million - (\$1,851 million - \$1,594 million) + \$427 million

Ending net operating working capital = \$280.6 million

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