What happens to Free Cash Flow if Net Working Capital decreases?

When Net Working Capital (NWC) decreases, it typically leads to an increase in Free Cash Flow (FCF). This is because a decrease in NWC indicates that a company is either collecting receivables more quickly, paying off its current liabilities, or reducing its inventory levels.

In terms of cash flow, when NWC decreases, it effectively means that less cash is tied up in operating assets like accounts receivable and inventory. This released cash can then be used for other purposes, such as reinvestments, paying down debt, or returning capital to shareholders. Therefore, as NWC decreases, the cash that was previously tied up returns to the firm's operations, directly increasing Free Cash Flow.

In summary, a decrease in Net Working Capital leads to more efficient use of cash, allowing the company to generate higher Free Cash Flow, making the first option a valid and logical conclusion regarding the relationship between NWC and FCF.