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)
4.2–4.3
4.3–4.11
Guidelines for Building “Good” Spreadsheet Models (Section 4.3)
4.12–4.16
Debugging a Spreadsheet Model (Section 4.4)
4.16–4.20
McGraw-Hill/Irwin
4.1
© The McGraw-Hill Companies, Inc., 2008
The Everglade Cash Flow Problem
McGraw-Hill/Irwin
Year
Projected Net Cash Flow
(millions of dollars)
2007
–8
2008
–2
2009
–4
2010
3
2011
6
2012
3
2013
–4
2014
7
2015
–2
2016
10
4.2
© The McGraw-Hill Companies, Inc., 2008
The Everglade Cash Flow Problem
•
Their short-term cash flow requirements cannot be met without borrowing.
•
A long-term (10 year) loan can be taken with an interest rate of 7%
•
A series of short-term 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 cash-balance position after 10 years?
McGraw-Hill/Irwin
4.3
© The McGraw-Hill Companies, Inc., 2008
The Process of Modeling
Visualize where you want to finish
Plan
Do some calculations by hand
Sketch out a spreadsheet
Expand the model
to full scale
Build
Start with a
small-scale model
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
McGraw-Hill/Irwin
4.4
© The McGraw-Hill Companies, Inc., 2008
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 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?
•
What information is needed in the Everglade Cash Flow problem?
McGraw-Hill/Irwin
4.5
© The McGraw-Hill Companies, Inc., 2008
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 long-term 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?
McGraw-Hill/Irwin
4.6
© The McGraw-Hill Companies, Inc., 2008
Plan: Sketch Out a Spreadsheet
LT Rate
ST Rate
Start Balance
Minimum Cash
Cash
Flow
LT
Loan
ST
Loan
LT
Interest
ST
Interest
LT
Payback
ST
Payback
Ending
Balance
Minimum
Balance
2007
2008
:
>=
:
2016
2017
McGraw-Hill/Irwin
4.7
© The McGraw-Hill Companies, Inc., 2008
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.
B
3
LT Rate
4
ST Rate
5
6
Start Balance
7 MinimumCash
8
9
10
Year
11
2007
12
2008
F
9
LT
10
Interest
11
12 =-LTRate*LTLoan
McGraw-Hill/Irwin
C
D
E
F
G
H
I
J
K
ST
Payback
Ending
Balance
1.00
1.38
L
7%
10%
1
0.5
(all cash figures in millions of dollars)
Cash
Flow
-8
-2
LT
Loan
6
ST
Loan
2
5
LT
Interest
ST
Interest
-0.42
-0.20
G
H
I
ST
Interest
LT
Payback
ST
Payback
=-STRate*E11
=-E11
4.8
LT
Payback
-2.00
J
Ending
Balance
=StartBalance+SUM(C11:I11)
=J11+SUM(C12:I12)
K
>=
>=
Minimum
Balance
>=
0.50
>=
0.50
L
Minimum
Balance
=MinimumCash
=MinimumCash
© The McGraw-Hill Companies, Inc., 2008
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:
• All zeroes
• All ones
• Very large numbers
• Numbers for which you’ve done hand calculations
•
Expand the model to full size (copying formulas to the later years).
•
Test the large model in a similar way.
McGraw-Hill/Irwin
4.9
© The McGraw-Hill Companies, Inc., 2008
Analyze: Analyze the Model (Before Solver)
B
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
C
LT Rate
ST Rate
7%
10%
Start Balance
Minimum Cash
1
0.5
Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
McGraw-Hill/Irwin
Cash
Flow
-8
-2
-4
3
6
3
-4
7
-2
10
D
E
F
G
H
I
J
LT
Payback
ST
Payback
-6
-2
-5
0
0
0
0
0
0
0
0
Ending
Balance
1.00
1.38
-8.54
-5.96
-0.38
2.20
-2.22
4.36
1.94
11.52
5.10
K
L
>=
>=
>=
>=
>=
>=
>=
>=
>=
>=
>=
Minimum
Balance
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
(all cash figures in millions of dollars)
LT
Loan
6
ST
Loan
2
5
0
0
0
0
0
0
0
0
LT
Interest
ST
Interest
-0.42
-0.42
-0.42
-0.42
-0.42
-0.42
-0.42
-0.42
-0.42
-0.42
-0.20
-0.50
0
0
0
0
0
0
0
0
4.10
© The McGraw-Hill Companies, Inc., 2008
Analyze: Analyze the Model (After Solver)
B
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
C
LT Rate
ST Rate
7%
10%
Start Balance
Minimum Cash
1
0.5
Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
McGraw-Hill/Irwin
Cash
Flow
-8
-2
-4
3
6
3
-4
7
-2
10
D
E
F
G
H
I
J
LT
Payback
ST
Payback
-6.65
-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
K
L
>=
>=
>=
>=
>=
>=
>=
>=
>=
>=
>=
Minimum
Balance
0.50
0.50
0.50
0.50
0.50
0.50
0.50
0.50
0.50
0.50
0.50
(all cash figures in millions of dollars)
LT
Loan
6.65
ST
Loan
0.85
3.40
8.21
6.49
1.61
0
3.70
0
0
0
LT
Interest
ST
Interest
-0.47
-0.47
-0.47
-0.47
-0.47
-0.47
-0.47
-0.47
-0.47
-0.47
-0.09
-0.34
-0.82
-0.65
-0.16
0
-0.37
0
0
0
4.11
© The McGraw-Hill Companies, Inc., 2008
Guidelines for Building
“Good” Spreadsheet Models
•
Enter the Data First
– Any spreadsheet model is driven by the data
– It is easier (and usually better) to build the model around the data
•
Organize and Clearly Identify the Data
– Relevant data should be grouped (e.g. in tabular form)
– All data should be labeled
– Units should be identified
•
Enter Each Piece of Data into One Cell Only
– Refer to the original data as needed
– This makes the model much easier to modify (only need to change data in one
place)
McGraw-Hill/Irwin
4.12
© The McGraw-Hill Companies, Inc., 2008
Guidelines for Building
“Good” Spreadsheet Models
•
Separate Data from Formulas
– 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
•
Keep It Simple
– Avoid “power functions” of Excel if possible
– Break out complicated formulas into subtotals
•
Use Range Names
– 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.
McGraw-Hill/Irwin
4.13
© The McGraw-Hill Companies, Inc., 2008
Guidelines for Building
“Good” Spreadsheet Models
•
Use Relative and Absolute References to Simplify Copying Formulas
– 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.
•
Use Borders, Shading, and Colors to Distinguish Cell Types
– For example:
• Data cells in blue (no border)
• Changing cells in yellow (regular border)
• Target cell in orange (heavy border)
•
Show Entire Model on Spreadsheet
– All data should be visible.
– All constraints should be on the spreadsheet (not buried in Solver), preferably in
three consecutive cells.
McGraw-Hill/Irwin
4.14
© The McGraw-Hill Companies, Inc., 2008
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.
McGraw-Hill/Irwin
4.15
© The McGraw-Hill Companies, Inc., 2008
A Poor Spreadsheet Model
B
3
4
5
6
7
8
9
10
11
12
13
14
15
Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
McGraw-Hill/Irwin
C
D
E
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
E
3
4
5
6
7
8
9
10
11
12
13
14
15
4.16
Ending
Balance
=1-8+C5+D5
=E5-2+D6-$C$5*(0.07)-D5*(1.1)
=E6-4+D7-$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$5*(0.07)-D9*(1.1)
=E10-4+D11-$C$5*(0.07)-D10*(1.1)
=E11+7+D12-$C$5*(0.07)-D11*(1.1)
=E12-2+D13-$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)
© The McGraw-Hill Companies, Inc., 2008
Debugging a Spreadsheet Model: The Toggle
B
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
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
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
(all cash figures in millions of dollars)
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
=-STRate*E11
=-STRate*E12
=-STRate*E13
=-STRate*E14
=-STRate*E15
=-STRate*E16
=-STRate*E17
=-STRate*E18
=-STRate*E19
=-STRate*E20
LT
Payback
=-LTLoan
ST
Payback
=-E11
=-E12
=-E13
=-E14
=-E15
=-E16
=-E17
=-E18
=-E19
=-E20
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 back-and-forth between showing values and
showing formulas in the spreadsheet.
McGraw-Hill/Irwin
4.17
© The McGraw-Hill Companies, Inc., 2008
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.
McGraw-Hill/Irwin
4.18
© The McGraw-Hill Companies, Inc., 2008
Dependents of the LT Loan Cell
LT Rate
ST Rate
Start Balance
Minimum Cash
Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
McGraw-Hill/Irwin
7%
10%
1
0.5
Cash
Flow
-8
-2
-4
3
6
3
-4
7
-2
10
(all cash figures in millions of dollars)
LT
Loan
6.65
ST
Loan
0.85
3.40
8.21
6.49
1.61
0
3.70
0
0
0
LT
Interest
ST
Interest
-0.47
-0.47
-0.47
-0.47
-0.47
-0.47
-0.47
-0.47
-0.47
-0.47
-0.09
-0.34
-0.82
-0.65
-0.16
0
-0.37
0
0
0
4.19
LT
Payback
ST
Payback
-6.65
-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
•
•
•
•
•
•
•
•
•
•
•
Minimum
Balance
0.50
0.50
0.50
0.50
0.50
0.50
0.50
0.50
0.50
0.50
0.50
© The McGraw-Hill Companies, Inc., 2008
Precedents of the ST Interest (2008) Cell
LT Rate
ST Rate
Start Balance
Minimum Cash
Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
7%
10%
1
0.5
Cash
Flow
-8
-2
-4
3
6
3
-4
7
-2
10
McGraw-Hill/Irwin
(all cash figures in millions of dollars)
LT
Loan
6.65
ST
Loan
0.85
3.40
8.21
6.49
1.61
0
3.70
0
0
0
LT
Interest
ST
Interest
-0.47
-0.47
-0.47
-0.47
-0.47
-0.47
-0.47
-0.47
-0.47
-0.47
-0.09
-0.34
-0.82
-0.65
-0.16
0
-0.37
0
0
0
4.20
LT
Payback
-6.65
ST
Payback
-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
•
•
•
•
•
•
•
•
•
•
•
Minimum
Balance
0.50
0.50
0.50
0.50
0.50
0.50
0.50
0.50
0.50
0.50
0.50
© The McGraw-Hill Companies, Inc., 2008