Instructor key — Module 3: The Anatomy of Add-Backs: SDE vs. Adjusted EBITDA Demystified
Instructor/solutions version. Keep separate from the student assignment during assessment.
Calculation solution
Reported EBITDA $480,000 includes owner wages $210,000. Replacement costs $165,000; removable personal expense is $18,000. Calculate managed EBITDA.
Calculated result: 543,000.00000000 (actual USD, except where the question requests a ratio or return). Remove the actual owner expense only after funding the required replacement role. Use appropriate display rounding while retaining formula precision. This result is generated from the independent assignment inputs, not copied from the chapter answer.
Conceptual and judgment marking
A complete conceptual response identifies the measure's economic purpose, the defined perimeter and the risk of confusing it with another metric. Award up to 20 points for explanation, not terminology alone. For the applied question, award up to 15 for linking evidence to a concrete acquisition consequence; do not require an optimistic recommendation.
Spreadsheet marking
Award 15 of the 30 spreadsheet points for live links from assumptions, 10 for a coherent 10% mutation and predicted direction, and 5 for units, readable formatting and checks. Inspect formulas directly rather than accepting cached numbers. Use the instructor workbook for the controlling capstone model; this independent lab uses different inputs.
Calculation marking: 10 points for the correct equation/perimeter, 15 for intermediate arithmetic, and 10 for result, units and rounding. Overall pass requires 80 and all critical checks in the student version.
Original chapter practice solutions
The following solutions were moved out of the chapter so full answers no longer sit immediately below student questions. Match them in order to the chapter's practice problems.
Worked solution: Correct the inventory error first: $540,000 − $40,000 = $500,000. Economic adjustments are $300,000 − $180,000 + $24,000 + $12,000 − $60,000 + $20,000 = $116,000. Adjusted EBITDA is $616,000. Adding back the assumed $180,000 replacement-manager cost gives one-owner SDE of $796,000. No depreciation or interest is added because the starting number already excludes them.
Worked solution: Supported personal expense is $30,000 × 60% = $18,000. Deduct the necessary $4,000 replacement expense to obtain a $14,000 accepted net adjustment. The remaining $12,000 business portion stays in operating costs. A truck purchase or tax depreciation claim would require separate analysis rather than increasing this operating-cost adjustment.
Worked solution: Only $15,000 of repair expense exceeds the supported recurring allowance. Adjusted EBITDA is $465,000. Adding the full $80,000 assumes the fleet needs no recurring repair expenditure. The buyer must also forecast maintenance CapEx because repair allowance and capital replacement address related but distinct needs.
Worked solution: The distribution did not reduce the starting EBITDA, so it creates no add-back. Managed EBITDA is $400,000 + $160,000 − $150,000 = $410,000. The withdrawal affects cash and equity, while compensation affects operating profit. Recording both as earnings adjustments would mistake a use of previously earned cash for a current operating expense.
Worked solution: Recurring EBITDA becomes $541,000 if the engineer is truly incremental to all included costs. At the unchanged illustrative multiple, EV becomes $2,164,000, a $300,000 reduction. Recruiting fees, transition timing, and acquisition funding should be modeled separately from the recurring wage adjustment. The buyer should verify that the role is not already covered by direct labor, overhead, or the general manager before making the deduction.