The 2018 income statement for Paige's Purses shows that depreciation expense is $10 million, EBIT is $25 million, EBT is $15 million, and the tax rate is 30 percent. At the beginning of the year, the balance of gross fixed assets was $80 million and net operating working capital was $30 million. At the end of the year gross fixed assets was $100 million. Paige's free cash flow for the year was $20 million. What is their end of year balance for net operating working capital?
A) $10.5 million
B) $14 million
C) $20.5 million
D) $30.5 million

Question

Quizplus · Accepted Answer

To find the end of year balance for net operating working capital (NOWC), we need to calculate the change in NOWC. Free cash flow (FCF) is calculated as: FCF = [EBIT(1-Tax Rate) + Depreciation] - [Change in Gross Fixed Assets + Change in NOWC]. Given FCF is $20 million, EBIT is $25 million, depreciation is $10 million, tax rate is 30%, and change in gross fixed assets is $20 million ($100 million - $80 million), we can solve for the change in NOWC. The calculation shows the change in NOWC is -$9.5 million, so the end of year NOWC is $30 million - $9.5 million = $20.5 million.

The 2018 Income Statement for Paige's Purses Shows That Depreciation