Instructor key — Module 6: Course 3 Capstone: Complete LBO & Debt Model for Precision Valve & Actuator
Instructor/solutions version. Keep separate from the student assignment during assessment.
Calculation solution
An investor contributes $800,000 and receives $1.6m exactly five years later with no interim flows. Calculate annual IRR.
Calculated result: 0.14869835 (actual USD, except where the question requests a ratio or return). MOIC is 2.0x; solve (1+r)^5=2 instead of dividing the total return by five. 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: Pretax income is $811,043.83 and taxes $202,760.96, giving net income $608,282.87. OCF is $608,282.87 + $200,000 D&A − $50,000 NWC = $758,282.87. Subtract $200,000 CapEx and $245,367.36 principal to retain $312,915.51. Opening $200,000 then yields ending cash $512,915.51. Interest is already included in net income.
Worked solution: The stipulated full-standby terms prohibit current payments and the note has no interest accrual. Principal remains a creditor claim repaid after senior payoff under the assumed authorized sale. Injection treatment is a separate limited-source calculation, capped in aggregate at half the required injection. The sponsor's cash already meets the minimum, so the base does not rely on note credit.
Worked solution: CFADS is $680,000 − $22,760.96 − $200,000 − $50,000 = $407,239.04. Subtract service $634,323.54 to obtain a deficit of $227,084.49 using unrounded inputs. Opening cash of $200,000 becomes negative $27,084.49. Preserving the $200,000 reserve requires the full $227,084.49 remedy, not merely enough to bring cash to zero.
Worked solution: Reduce proceeds by $200,000 to $5,043,726.23. MOIC is approximately 4.2031x. The reduction concerns the cash delivered under the sale terms, not another deduction of the normal NWC already included in EV. The return model must use the actual agreement rather than assume every cash dollar is distributable.
Worked solution: The buyer's stricter CFADS covenant fails after only about 5.72% revenue decline, well before the EBITDA-based ratio reaches 1.25x. Rate resets, collection delays, and fixed-cost rigidity can compound the exposure. Approval should address downside liquidity, eligible terms, and verified earnings rather than treat attractive historical coverage and exit returns as a complete credit decision.