# 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).

## Formula

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

## Example

Find net operating working capital using the following information:

01-Jan-1331-Dec-13
Net operating working capital40,000,00045,000,000
Long-term operating assets80,000,00094,000,000

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.

Solution

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

by Obaidullah Jan, ACA, CFA and last modified on

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