Net Investment in Operating Capital
Net investment in operating capital for a period is the increase in total net operating capital during the period. It represents the amount of new investment in operating assets to fund a company's new level of operations.
Net investment in operating capital is the amount that is subtracted from net operating profit after tax (NOPAT) to find the free cash flow (FCF).
Net investment in operating capital = closing total net operating capital − beginning total net operating capital
Total net operating capital = net operating working capital + long-term operating assets
Find net operating working capital using the following information:
|Net operating working capital||40,000,000||45,000,000|
|Long-term operating assets||80,000,000||94,000,000|
If net operating profit after tax for the year ended 31 December 2013 is $32,000,000, also find the free cash flow for the year.
Total net operating working capital as at 1 Jan 2013 = $40 million + $80 million= $120 million
Total net operating working capital as at 31 Dec 2013 = $45 million + $94 million= $139 million
Net investment in operating capital = $139 million − $120 million = $19 million
Free cash flow for financial year 2013 = $32 million − $19 million = $13 million
Written by Obaidullah Jan, ACA, CFA