Instructor key — Module 6: Course 2 Capstone: Normalizing Vanguard Industrial Machining
Instructor/solutions version. Keep separate from the student assignment during assessment.
Calculation solution
Reported EBITDA $650,000 includes owner pay $250,000; replacement $190,000, personal costs $22,000 and rent increase $35,000. Correct current-year stock overstatement $30,000 and calculate recurring EBITDA.
Calculated result: 667,000.00000000 (actual USD, except where the question requests a ratio or return). Stock correction is an accounting loss; replacement and rent normalize the organization. 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: Reported EBITDA is $335,000 net income plus $55,000 interest plus $150,000 D&A, or $540,000. The inventory correction reduces it to $500,000. Net recurring normalization adds $116,000, producing $616,000. None deducts all cash taxes, investment, debt principal, or distributions. Normalized earnings also assume costs different from the actual historical owner arrangement.
Worked solution: Equity is $1,243,100 + $345,855 − $120,000 = $1,468,955. Another $50,000 distribution reduces both cash and equity by $50,000, leaving earnings unchanged. Year 2 cash would become $193,355 and equity $1,418,955. Both sides of the balance sheet decline equally; distributions are not operating expenses.
Worked solution: Receivables become $680,000, PP&E becomes $990,000, and net income falls to $263,100. Equity becomes $1,183,100. With cash $71,100, inventory $525,000, and prepayments $42,000, total assets equal $2,308,100. Liabilities remain $367,500 payables, $157,500 accruals, and $600,000 debt, totaling $1,125,000; adding equity gives the same $2,308,100. The model balances while still breaching minimum cash, proving that accounting consistency and financial viability are separate tests.
Worked solution: Identify the continuing sales workload and price a credible replacement or explicitly assign compensated owner labor. Do not keep the full $120,000 compensation adjustment while assuming an additional necessary role costs nothing. Recalculate recurring EBITDA, taxes, liquidity, and valuation sensitivity. The evidence register should identify the missing role, hiring support, and decision consequence rather than merely label the issue “management risk.”