These exercises combine the financial statements, ratio analysis, the time value of money, NPV, and capital budgeting. They illustrate the type of reasoning that may be required in the final exam. The final exam may combine the material in different ways.
Northline Retail is fictional. All figures are classroom assumptions.
Show the calculation and explain what the result means for the decision. Solutions are not published here.
- Exercises 1 and 2 use € millions.
- Exercises 3 to 5 show the full euro amounts.
- Use the NPV Lab, in the next tab, where the question asks for IRR.
| Exercise | Main material tested |
|---|
| 1 | The income statement, balance sheet, and cash flow statement |
| 2 | Profitability, liquidity, leverage, efficiency, and operating cash flow |
| 3 | Timelines, present value, and NPV |
| 4 | Incremental cash flows and project appraisal |
| 5 | NPV, IRR, payback, and scenario changes |
| 6 | Integrated diagnosis and recommendation |
Exercises 1 and 2 share the same financial statements. Exercises 3 to 5 can be used independently. Exercise 6 uses evidence from the preceding exercises.
Exercise 1: Reading the three financial statements
Northline Retail reports the following summary for FY2026.
Income statement
| Item | €m |
|---|
| Sales | 800 |
| Cost of goods sold | (480) |
| Gross profit | 320 |
| Operating expenses | (240) |
| Operating profit | 80 |
| Interest expense | (15) |
| Tax | (13) |
| Net profit | 52 |
Balance sheet at the end of FY2026
| Assets | €m | Liabilities and equity | €m |
|---|
| Cash | 30 | Payables | 140 |
| Receivables | 90 | Short-term debt | 60 |
| Inventory | 160 | Long-term debt | 260 |
| Non-current assets | 520 | Equity | 340 |
| Total assets | 800 | Total liabilities and equity | 800 |
Cash flow statement
| Item | €m |
|---|
| Cash flow from operating activities | +40 |
| Cash flow from investing activities | (110) |
| Cash flow from financing activities | +50 |
| Net change in cash | (20) |
| Opening cash balance | 50 |
| Closing cash balance | 30 |
A manager says: “Northline earned €52 million, so its cash must have increased by €52 million.”
- Which statement reports the €52 million result, and what period does it cover?
- Which statement confirms how much cash Northline held at the reporting date?
- Use the cash flow statement to explain why the cash balance fell during FY2026.
- Can the summary above explain exactly why net profit of €52 million produced only €40 million of operating cash flow? State what additional information you would need.
- Which cash-flow category would normally include the purchase of new equipment?
Exercise 2: Ratio diagnosis
Use Northline's FY2026 statements from Exercise 1 together with the following opening balances:
- Opening inventory: €140 million
- Opening total assets: €740 million
Compare your results with the following classroom reference values for similar retailers.
| Measure | Reference value |
|---|
| Operating margin | 9.0% |
| Current ratio | 1.60 |
| Quick ratio | 0.90 |
| Liabilities to assets | 50.0% |
| Inventory days | 85 days |
| Asset turnover | 1.10 |
| Operating cash flow as a share of sales | 8.0% |
- Calculate Northline's gross, operating, and net margins.
- Calculate its current ratio and quick ratio.
- Calculate liabilities to assets and equity to assets.
- Calculate inventory turnover and inventory days using average inventory.
- Calculate asset turnover using average total assets.
- Calculate operating cash flow as a share of sales.
- Northline asks a bank for a new five-year loan. Recommend approval, conditional approval, or rejection. Support the recommendation with the strongest positive indicator, the strongest concern, and one piece of additional evidence you would request.
Exercise 3: Timing and NPV
Northline can invest €200,000 in a customer-ordering system. The expected cash flows are shown below.
| Time | 0 | 1 | 2 | 3 |
|---|
| Cash flow | -€200,000 | +€70,000 | +€90,000 | +€110,000 |
Northline uses a 7% discount rate.
- Calculate the present value of each future cash flow.
- Calculate NPV and apply the NPV decision rule.
- Explain the financial meaning of the result without describing NPV as a separate cash receipt.
- A supplier delay moves the €90,000 receipt from time 2 to time 3. All other cash flows remain unchanged. Recalculate NPV and explain the change.
Exercise 4: Investment proposal audit
Northline is considering an automated returns system. Finance has collected the following information:
- Equipment would cost €320,000 at time 0.
- Installation would cost €30,000 at time 0.
- Staff training would cost €20,000 before operations begin.
- Northline paid €45,000 for a feasibility study before the current decision. The study contains useful demand forecasts.
- The system would reduce annual cash labour costs by €150,000 for four years.
- Software support would cost €25,000 in each operating year.
- The system would occupy a unit that Northline currently rents to another business for €18,000 per year. The rental income would end.
- Head office would allocate €12,000 of existing overhead to the project each year. Total company overhead would remain unchanged.
- The accounts would record €87,500 of annual depreciation. Tax effects are excluded from the case.
- Northline expects to sell the equipment for €40,000 at the end of year 4 and pay €10,000 to remove it.
Northline uses a 9% discount rate.
- Classify every item as included or excluded from the project cash flows. Give the amount, sign, timing, and reason.
- Calculate the cash flow at time 0, the normal annual operating cash flow, and the total cash flow in year 4.
- Calculate NPV and IRR. Use the NPV Lab to find IRR.
- Calculate payback, assuming the operating cash flows arrive evenly during each year.
- State the recommendation given by NPV and IRR. Explain what payback adds to the analysis.
Exercise 5: Conflicting project rankings
Northline can finance either of two systems for the same distribution centre. The systems perform the same function, so it can install only one. Each system lasts four years and has no terminal cash flow.
| Time | 0 | 1 | 2 | 3 | 4 |
|---|
| Project Alpha | -€1,000,000 | +€350,000 | +€350,000 | +€350,000 | +€350,000 |
| Project Beta | -€300,000 | +€110,000 | +€110,000 | +€110,000 | +€110,000 |
Northline uses a 10% discount rate.
- Calculate NPV, IRR, and payback for both projects.
- Identify which project each measure ranks first.
- Recommend one project under the cash-flow assumptions provided. Explain which measure governs your recommendation and what the other measures add.
- The implementation team then reports that Project Alpha will produce only €175,000 at time 1. Its other cash flows remain unchanged. Recalculate Alpha's NPV, IRR, and payback.
- Revise the recommendation and identify the evidence management should request before approving either project.
Exercise 6: Audit an analyst's recommendation
An analyst prepares the following note using the information from Exercises 1 to 5:
Northline reported €52 million of net profit, which confirms that cash generation is strong. Its current ratio of 1.40 proves that it can cover its short-term obligations. The €45,000 feasibility study should be included in the returns-system cash flows because the committee will use its forecasts. Depreciation should also be deducted because it reduces profit, while the lost rental income can be ignored because Northline makes no payment. Project Alpha should be selected because its base-case NPV is the highest and it will therefore remain the best project if implementation is delayed.
- Identify every claim that is unsupported or financially incorrect.
- Correct each claim using evidence from the preceding exercises.
- Write a revised recommendation of no more than 150 words. It must include one decision, the financial evidence supporting it, the principal uncertainty, and one request for management.