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Chapter 2 Introduction to Spreadsheet Modeling

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Introduction Introduction to Excel modeling – illustrates some interesting and relatively simple models. Modeling process – less well known, but particularly helpful, Excel tools that are available

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Spreadsheet Modeling Elements of a spreadsheet/mathematical models – Inputs Known, estimated, uncertain – Decision variables Values must be determined using the model – Outputs Values of interest Computed from the inputs and the decision variables.

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Spreadsheet Modeling Using the model – Optimization – Sensitivity analysis – Prepare reports

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Best practices Readability of the model – Clear and logical layout – Separation of different parts of a model – Clear headings for all inputs, decision variables, and outputs – Range names – Formatting features – bold, italics, coloring, etc. – Cell comments – Text boxes for assumptions and explanations

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Best practices Modelling The formulas and logic must be correct Breakdown computations to small chunks and build Model must be flexible for modification Plan ahead, revise your plan as needed

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Six models ExampleExcel fileConcepts NCAA T-Shirts01-TShirt Sales-Shell.xlsx Basic modeling concepts Creating names for cells Excel IF function Bookshelves02-Bookshelf Costs- Shell.xlsx Absolute cell references Creating basic charts Break even analysis03-Breakeven Analysis- Shell.xlsx Cell comments One-way Data Table Goal seek Formula Auditing

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Six models ExampleExcel fileConcepts Ordering with quantity discounts 04-Quantity Discounts-Shell.xlsx IF, MAX, MIN functions VLOOKUP function Two-way Data Table SUMPRODUCT function Adding cell comments and text boxes Golf club demand05-Golf Club Demand- Shell.xlsx Scatter plot trend lines INDEX function MATCH function Absolute reference in conditional formatting NPV at Acron06-Calculating NPV- Shell.xlsx NPV function Data Table Conditional formatting

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Summary of Management Science terms TermExplanationPage Model inputsThe numeric values that are given in any problem statement 22 Decision variablesThe variables a decision maker has control over to obtain better solutions 22 Model outputsThe numeric values that result from combinations of inputs and decision variables through the use of logical formulas 22 Net present value (NPV)The current worth of a stream of cash flows that occur in the future 55 Discount rateInterest rate used for discounting future cash flows to get the net present value 55

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Summary of Key Excel Terms TermExplanationExcelPage IF functionUseful for implementing logic =IF(condition,resultIfTrue, resultIfFalse) 24 Relative, absolute cell addresses Useful for copying formulas; absolute row or column stays fixed, relative row or column "moves" A1 (relative), $A1 or A$1 (mixed), $A$1 (absolute); press F4 to cycle through possibilities 29 Range namesUseful for making formulas more meaningful Type name in Name box, or use Create from Selection shortcut (Ctrl+Shift+F3) 33 Pasting range names Provides a list of all range names in the current workbook Use Paste List from Use in Formula dropdown list (F3) 33 Cell commentsUseful for documenting contents of the cell Right-click on cell, select Insert Comment menu item 34

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Summary of Key Excel Terms TermExplanationExcelPage One-way data table Shows how one or more outputs vary as a single input varies Use Data Table from What-If Analysis dropdown list 36 Goal SeekSolves one equation in one unknown Use Goal Seek from What-If Analysis dropdown list 37 Formula Auditing toolbar Useful for checking which cells are related to other cells through formulas Use Formula Auditing buttons on Formulas ribbon 38 f x buttonUseful for getting help on Excel functions On Formula Bar42 VLOOKUP function Useful for finding a particular value based on a comparison =VLOOKUP(valueToCompare, lookupTable, columnToReturn) 42 Two-way data table Shows how a single output varies as two inputs vary Use Data Table from What-If Analysis dropdown list 43

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Summary of Key Excel Terms TermExplanationExcelPage SUMPRODUCT function Calculates the sum of products of values in two (or more) similar- sized ranges =SUMPRODUCT(rang e1,range2) 44 Trendline toolSuperimposes the best- fitting line or curve of a particular type on a scatter chart or time series graph With chart selected, right-click on any point and select Add Trendline 47 Conditional formatting Formats cells depending on whether specified conditions hold Use Conditional Formatting on Home ribbon 51 Splitting screenUseful for separating the screen horizontally and/or vertically Use screen splitters at top and right of scrollbars 57

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Summary of Key Excel Terms TermExplanationExcelPage Efficient selectionUseful for selecting a large rectangular range While pressing the Shift key, click on upper-left and bottom-right cells of range 58 Efficient copyingShortcut for copying a formula to a range Select the range, enter the formula, and press Ctrl+Enter 58 NPV functionCalculates NPV of a stream of cash flows at the ends of consecutive years, starting in year 1 =NPV(discountRate,c ashFlows) 58

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