The Art of Modeling with Spreadsheets - Cal...
Transcript of The Art of Modeling with Spreadsheets - Cal...
The Art of Modeling with Spreadsheets
Chapter 4: Hillier and Hillier
Agenda
Case Study: The Everglade Golden Years Company
Process of Modeling with Spreadsheets Guidelines for Good Spreadsheets Debugging the Spreadsheet
The Everglade Golden Years Company
The Everglade Golden Years Company has a short-term cash flow problem.
It must decide on a borrowing strategy to optimize its long-run net cash flow at the end of year 2012.
The two components that Everglade can use in its borrowing strategies are: – One year short-term loans – Long-term loans
The Everglade Golden Years Company Cont.
Terms of the short-term loan – Interest and principle paid at the end of the year – Interest rate: 10% APR – Loan can be taken out in any year
Terms of the long-term loan – Ten year loan – Interest is paid on the loan each year – Principle is paid back after the ten year period with no
prepayment possible – Interest rate: 7% APR
The Everglade Golden Years Company Cont.
Everglade would like to maintain a cash balance each year of $500,000
Everglade has a $1,000,000 in its bank currently
The projected net cash flow for Everglade is given on the next slide.
The Everglade Golden Years Company Cont.
Year Projected Net Cash Flow ($ Mil.)
Year Projected Net Cash Flow ($ Mil.)
2003 -8 2008 3
2004 -2 2009 -4
2005 -4 2010 7
2006 3 2011 -2
2007 6 2012 10
Process of Modeling with Spreadsheets
Four major stages when building a spreadsheet model: – Planning Stage – Building Stage – Testing Stage – Analysis Stage
Planning Stage
Visualize and diagram the process you are trying to model – It can be very useful to put together a visual sketch of
what processes are occurring in your model – This is a conceptual drawing of the process you are
modeling Calculate by hand answers for different
components by hand – This will allow you to see what is going on at each
component within your model
Planning Stage Cont.
Sketch a spreadsheet that represents the visual diagram you developed – This should be a visual sketch of the
spreadsheet that only has important components that come from your visual sketch
Diagram of Everglade’s Model
BankTake No Loan
Year i
BankTake Short-Term Loan
Year i
BankTake Long-Term Loan
Year i
Ending Cash FlowYear i
Goal:Maintain $500K
Goal:Highest Net Cash Flow in Year 2013
Beginning Cash FlowYear i
Spreadsheet Diagram of Everglade’s Model
L-T Rate
S-T Rate
Start Balance
Minimum Cash
Year Cash Flow
L-T Loan
S-T Loan
L-T Interest
S-T Interest
L-T Payback
S-T Payback
Ending Balance
Minimum Balance
2003
2007
2012
2013
Building and Testing Phase
The building and testing phase are intertwined with each other.
Usually there will be many iterations within the building and testing stage.
If the spreadsheet model has any complexity, you will want to build and test a small version of the model. – This is useful when your spreadsheet has a time
component or when it has many modules used for calculations.
Building and Testing Phase Cont.
Once you have a small working version of the spreadsheet model, you want to build and test the full-scale version. – If you put together a small spreadsheet model
that was representative of the model needed to solve the problem, it should be fairly straight forward to expand to the full-scale model.
– When testing the model, you should try to put in data that you know the answer to.
Analysis Stage
In the analysis stage, you will take the spreadsheet model and use it to examine the question at hand.
This is when you use the Solver tool to find the optimal answer.
In this stage you are doing the ultimate test of the spreadsheet model. – If the spreadsheet does not give satisfactory answers,
you may have to return to the building stage.
Guidelines for Building Good Spreadsheets
Enter the data first – Since the data can dictate the structure of the
spreadsheet model, it is valuable to input the data in the spreadsheet first.
– This can also allow you to build the spreadsheet to closely resemble the structure of the data.
Organize and clearly identify the data – Data should be grouped together in a convenient
format. – Each piece of data or group of data should be
appropriately labeled.
Guidelines for Building Good Spreadsheets Cont.
Enter each piece of data into one cell only – If you need to use the data elsewhere in the model, you
can reference it. Separate data from formulas
– If possible, formulas should have no specific parameters encoded in them.
– By keeping the data separate from formulas, you can save time when changes are needed by only having to change one parameter rather than looking for all the formulas that use a specific piece of data.
– This allows all the data to be visual in the spreadsheet.
Guidelines for Building Good Spreadsheets Cont.
Keep it simple – You should avoid more powerful functions when
simpler ones will accomplish the same task. – Keep formulas simple.
• If you have a very complicated formula, you should break it up into components on the spreadsheet.
Use range names – Range names should be indicative of what they
represent. – When using range names, care should be taken not to
allow too many range names so the names become unwieldy.
Guidelines for Building Good Spreadsheets Cont.
Use relative and absolute references to simplify copying formulas – This also allows you to copy cells without
making as many errors. Use borders, shading, and colors to
distinguish between cell types – This will make it easy for you to keep track of
the items within your spreadsheet model.
Guidelines for Building Good Spreadsheets Cont.
Show the entire model on the spreadsheet – You should attempt to put as many of the
elements of the model on the spreadsheet. • This will allow others to more easily understand
your model. • This will allow people using the spreadsheet to more
easily understand the Solver dialog box.
Debugging a Spreadsheet Model
Toggle – By using CTRL~, you can toggle between the results of
cells and the formulas in the cells. – This will allow you to look at multiple formulas at
once. Excel’s Auditing Toolbar
– Excel has an Auditing tool that allows you to examine precedent cells and dependent cells.
– This tool can be useful to you by visually showing you how the cells are interconnected.
Debugging a Spreadsheet Model Cont.
Divide and Conquer – This is a method that requires that you breakup
the model into components and test each component to find errors.
– It is a valuable method for debugging spreadsheet models.