Madura Inc.wants to increase its free cash flow by $180 million during the coming year,which should result in a higher EVA and stock price.The CFO has made these projections for the upcoming year:
What increase in net operating working capital (in millions of dollars)would enable the firm to meet its target increase in FCF?

Question

Madura Inc.wants to increase its free cash flow by $180 million during the coming year,which should result in a higher EVA and stock price.The CFO has made these projections for the upcoming year: ​  ​
What increase in net operating working capital (in millions of dollars)would enable the firm to meet its target increase in FCF?

Quizplus · Accepted Answer

To calculate the increase in net operating working capital, we need to use the following formula:
Change in Net Operating Working Capital = Current Net Operating Working Capital - Previous Net Operating Working Capital

We are given the current and previous values of net operating working capital, as well as the projected values of other variables. Using the formula and plugging in the values, we get:

Change in Net Operating Working Capital = $306 - $150 - $140 - ($200 - $140 - $140) = $16 million

This means that the current net operating working capital is $16 million higher than the target level. To reach the target level and increase FCF by $180 million, the firm will need to reduce net operating working capital by an additional $156 million ($16 million + $156 million = $180 million). Therefore, the correct answer is B.