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Unformatted text preview: Table of Contents Chapter 4 (The Art of Modeling with Spreadsheets)
The Everglade Golden Years Co. Cash Flow Problem (Section 4.1) The Process of Modeling with Spreadsheets (Section 4.2) Guidelines for Building “Good” Spreadsheet Models (Section 4.3) Debugging a Spreadsheet Model (Section 4.4) 4.2–4.3 4.3–4.11 4.12–4.16 4.16–4.20 1 The Everglade Cash Flow Problem
Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Projected Net Cash Flow (millions of dollars) –8 –2 –4 3 6 3 –4 7 –2 10 2 The Everglade Cash Flow Problem Their shortterm cash flow requirements cannot be met without borrowing. A longterm (10 year) loan can be taken with an interest rate of 7% A series of shortterm loans (1 year) can be taken with a projected interest rate of 10% Question: Which loan (or combination of loans) should be taken, and in what amounts, in order to maximize their cashbalance position after 10 years? 3 The Process of Modeling
Visualize where you want to finish Plan Do some calculations by hand Sketch out a spreadsheet Build Start with a smallscale model Expand the model to full scale Test Try different trial solutions to check the logic Analyze Evaluate proposed solutions and/or optimize with Solver If the solution reveals inadequacies in the model, return to Plan or Build 4 Plan: Visualize Where You Want to Finish A common stumbling block in the modeling process occurs right at the beginning—”How do I get started?” At this point it can be useful to ask the question—”Where do I want to end up?” What information is needed in the Everglade Cash Flow problem? What information do I need to provide in a report? What should the “answer” look like? What kinds of numbers need to be included in the recommendation? 5 Plan: Do Some Calculations by Hand Another common stumbling block arises when trying to enter a formula in one of the output cells. At this point, it can be useful to do some calculations by hand. Just pick some numbers for the changing cells and determine what the results should be. Suppose Everglade takes out a $6 million longterm loan and then adds shortterm loans of $2 million in 2007 and $5 million in 2008. How much cash will they have left at the end of 2007? How much cash will they have left at the end of 2008? 6 Plan: Sketch Out a Spreadsheet LT Rate ST Rate Start Balance Minimum Cash Cash Flow 2007 2008 : LT Loan ST Loan LT Interest ST Interest LT Payback ST Payback Ending Balance Minimum Balance >=
: 2016 2017 7 Build: Start with a Small Version If the model is complicated, start with a small, readily manageable version of the model. First make sure you’ve got the logic of the model worked out correctly for the small version. Only then expand it to full size.
3 LT Rate 4 ST Rate 5 6 Start Balance 7 MinimumCash 8 9 10 Year 11 2007 12 2008 B C D E F G H I J K L 7% 10% 1 0.5 Cash Flow 8 2
G (all cash figures in millions of dollars) LT Loan 6 ST Loan 2 5
H LT Interest 0.42
I ST Interest 0.20 LT Payback ST Payback 2.00 Ending Balance 1.00 1.38
K Minimum Balance >= 0.50 >= 0.50
L F 9 LT 10 Interest 11 12 =LTRate*LTLoan J ST Interest =STRate*E11 LT Payback ST Payback =E11 Ending Balance =StartBalance+SUM(C11:I11) =J11+SUM(C12:I12) >= >= Minimum Balance =MinimumCash =MinimumCash 8 Test: Test the Small Version of the Model Test the small model thoroughly. Try values in the changing cells for which you know the answers (at least approximately). Examples: Expand the model to full size (copying formulas to the later years). Test the large model in a similar way. All zeroes All ones Very large numbers Numbers for which you’ve done hand calculations 9 Analyze: Analyze the Model (Before Solver)
B C D E F G H I J K L 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 LT Rate ST Rate Start Balance Minimum Cash 7% 10% 1 0.5 Cash Flow 8 2 4 3 6 3 4 7 2 10 LT Loan 6 ST Loan 2 5 0 0 0 0 0 0 0 0 (all cash figures in millions of dollars) Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 LT Interest 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 ST Interest 0.20 0.50 0 0 0 0 0 0 0 0 LT Payback ST Payback 2 5 0 0 0 0 0 0 0 0 6 Ending Balance 1.00 1.38 8.54 5.96 0.38 2.20 2.22 4.36 1.94 11.52 5.10 >= >= >= >= >= >= >= >= >= >= >= Minimum Balance 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 10 10 Analyze: Analyze the Model (After Solver)
B C D E F G H I J K L 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 LT Rate ST Rate Start Balance Minimum Cash 7% 10% 1 0.5 Cash Flow 8 2 4 3 6 3 4 7 2 10 LT Loan 6.65 ST Loan 0.85 3.40 8.21 6.49 1.61 0 3.70 0 0 0 (all cash figures in millions of dollars) Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 LT Interest 0.47 0.47 0.47 0.47 0.47 0.47 0.47 0.47 0.47 0.47 ST Interest 0.09 0.34 0.82 0.65 0.16 0 0.37 0 0 0 LT Payback ST Payback 0.85 3.40 8.21 6.49 1.61 0 3.70 0 0 0 6.65 Ending Balance 0.50 0.50 0.50 0.50 0.50 1.27 0.50 2.97 0.50 10.03 2.92 >= >= >= >= >= >= >= >= >= >= >= Minimum Balance 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 11 11 Guidelines for Building “Good” Spreadsheet Models Enter the Data First Organize and Clearly Identify the Data Any spreadsheet model is driven by the data It is easier (and usually better) to build the model around the data Relevant data should be grouped (e.g. in tabular form) All data should be labeled Units should be identified Refer to the original data as needed This makes the model much easier to modify (only need to change data in one place) Enter Each Piece of Data into One Cell Only 12 12 Guidelines for Building “Good” Spreadsheet Models Separate Data from Formulas Keep It Simple Avoid putting numbers directly in formulas Put numbers in data cells and refer to them as needed This makes all data visible and easier to modify Avoid “power functions” of Excel if possible Break out complicated formulas into subtotals Refer to data cells and blocks of cells using Excel’s range name feature Range names make formulas and the Solver model much easier to read Care must be taken not to overuse range names and to make sure they remain correctly defined. Use Range Names 13 13 Guidelines for Building “Good” Spreadsheet Models Use Relative and Absolute References to Simplify Copying Formulas Use Borders, Shading, and Colors to Distinguish Cell Types Whenever multiple related formulas will be needed, try to enter the formula just once, and then use Excel’s fill commands to replicate the formula. This makes the model easer to build and also reduces typos. For example: Show Entire Model on Spreadsheet Data cells in blue (no border) Changing cells in yellow (regular border) Target cell in orange (heavy border) All data should be visible. All constraints should be on the spreadsheet (not buried in Solver), preferably in three consecutive cells. 14 14 Three Tests for a “Good” Spreadsheet Model You should be able to immediately identify the data cells, changing cells, and target cell. All elements of the model should be visible on the spreadsheet (including all constraints). You should not have to look in the Solver dialogue box to figure out the model. Each equation should be simple enough that you can tell what the equation is in each output cell without looking. 15 15 A Poor Spreadsheet Model
3 4 5 6 7 8 9 10 11 12 13 14 15 B C D E Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 LT Loan 6.65 ST Loan 0.85 3.40 8.21 6.49 1.61 0 3.70 0 0 0 Ending Balance 0.50 0.50 0.50 0.50 0.50 1.27 0.50 2.97 0.50 10.03 2.92 3 4 5 6 7 8 9 10 11 12 13 14 15 E Ending Balance =18+C5+D5 =E52+D6$C$5*(0.07)D5*(1.1) =E64+D7$C$5*(0.07)D6*(1.1) =E7+3+D8$C$5*(0.07)D7*(1.1) =E8+6+D9$C$5*(0.07)D8*(1.1) =E9+3+D10$C$5*(0.07)D9*(1.1) =E104+D11$C$5*(0.07)D10*(1.1) =E11+7+D12$C$5*(0.07)D11*(1.1) =E122+D13$C$5*(0.07)D12*(1.1) =E13+10+D14$C$5*(0.07)D13*(1.1) =E14+D15$C$5*(1.07)D14*(1.1) 16 16 Debugging a Spreadsheet Model: The Toggle
3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 B C D E F G H I J K L LT Rate 0.07 ST Rate 0.1 Start Balance 1 Minimum Cash 0.5 (all cash figures in millions of dollars) 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Cash LT ST LT Flow Loan Loan Interest 8 6.64945900216724 0.85054099783276 2 3.40105722776774 =LTRate*LTLoan 4 8.20662508069623 =LTRate*LTLoan 3 6.49274971891755 =LTRate*LTLoan 6 1.60748682096102 =LTRate*LTLoan 3 0 =LTRate*LTLoan 4 3.69915976336053 =LTRate*LTLoan 7 0 =LTRate*LTLoan 2 0 =LTRate*LTLoan 10 0 =LTRate*LTLoan =LTRate*LTLoan ST Interest LT Payback ST Payback =E11 =E12 =E13 =E14 =E15 =E16 =E17 =E18 =E19 =E20 =STRate*E11 =STRate*E12 =STRate*E13 =STRate*E14 =STRate*E15 =STRate*E16 =STRate*E17 =STRate*E18 =STRate*E19 =STRate*E20 =LTLoan Ending Balance =StartBalance+SUM(C11:I11) =J11+SUM(C12:I12) =J12+SUM(C13:I13) =J13+SUM(C14:I14) =J14+SUM(C15:I15) =J15+SUM(C16:I16) =J16+SUM(C17:I17) =J17+SUM(C18:I18) =J18+SUM(C19:I19) =J19+SUM(C20:I20) =J20+SUM(C21:I21) Minimum Balance >= =MinimumCash >= =MinimumCash >= =MinimumCash >= =MinimumCash >= =MinimumCash >= =MinimumCash >= =MinimumCash >= =MinimumCash >= =MinimumCash >= =MinimumCash >= =MinimumCash Pressing control~ toggles backandforth between showing values and showing formulas in the spreadsheet. 17 17 Debugging with the Auditing Toolbar The button third from the left can be used to trace the dependents of a cell, that is, those cells with formulas that refer to this cell. The leftmost button can be used to trace the precedents of a cell, that is, those cells that appear within the formula for this cell. 18 18 Dependents of the LT Loan Cell
LT Rate ST Rate Start Balance Minimum Cash 7% 10% 1 0.5 Cash Flow 8 2 4 3 6 3 4 7 2 10 LT Loan 6.65 ST Loan 0.85 3.40 8.21 6.49 1.61 0 3.70 0 0 0 (all cash figures in millions of dollars) Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 LT Interest 0.47 0.47 0.47 0.47 0.47 0.47 0.47 0.47 0.47 0.47 ST Interest 0.09 0.34 0.82 0.65 0.16 0 0.37 0 0 0 LT Payback ST Payback 0.85 3.40 8.21 6.49 1.61 0 3.70 0 0 0 6.65 Ending Balance 0.50 0.50 0.50 0.50 0.50 1.27 0.50 2.97 0.50 10.03 2.92 Minimum Balance 0 .50 0 .50 0 .50 0 .50 0 .50 0 .50 0 .50 0 .50 0 .50 0 .50 0 .50 19 19 Precedents of the ST Interest (2008) Cell
LT Rate ST Rate Start Balance Minimum Cash 7% 10% 1 0.5 Cash Flow 8 2 4 3 6 3 4 7 2 10 LT Loan 6.65 ST Loan 0.85 3.40 8.21 6.49 1.61 0 3.70 0 0 0 (all cash figures in millions of dollars) Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 LT Interest 0.47 0.47 0.47 0.47 0.47 0.47 0.47 0.47 0.47 0.47 ST Interest 0.09 0.34 0.82 0.65 0.16 0 0.37 0 0 0 LT Payback ST Payback 0.85 3.40 8.21 6.49 1.61 0 3.70 0 0 0 6.65 Ending Balance 0.50 0.50 0.50 0.50 0.50 1.27 0.50 2.97 0.50 10.03 2.92 Minimum Balance 0 .50 0 .50 0 .50 0 .50 0 .50 0 .50 0 .50 0 .50 0 .50 0 .50 0 .50 20 20 ...
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This note was uploaded on 04/21/2009 for the course BUS 338W1 taught by Professor White during the Winter '09 term at University of MichiganDearborn.
 Winter '09
 White
 Business

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