Lesson 6: Modeling Basics

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1 Lesson 6: Modeling Basics MyEducator Issues? So you did everything and received a zero Make sure you don t change the file name If you have done work in Filename(2) or Filename-2 Happens when you download the file more than once Save As Filename Close all other Excel files Then Submit Refresh website if videos don t show Use Firefox rather than Internet Explorer If your computer is having issues with the Excel files, make sure to allow enough time to find an alternative way to submit your assignment (computing commons, library, Citrix). MyEducator Looking Ahead Concepts you will learn about A model with definite solutions Scenarios Goal-seeking Data tables A model is a physical representation of a larger or more complicated thing or idea. A spreadsheet model is generally used to represent the logic of a more complicated logical process. Just as a good model contains enough detail to accurately depict the thing or idea it represents, a good spreadsheet model must be detailed enough to capture the salient elements of the logical process it represents. Constructing good spreadsheet models takes practice, but it can be an extremely valuable skill. Models can be summed up as a set of equations. When you created a model, you will have a set of equations. Independent variables you specify these values Dependent variables based on the values you set for the independent variables, the dependent variables are calculated. When you know the values, you can get a result. Example: Take a look at the example to the right. Which fields would know when you start? Which fields rely on / change based on the fields you know at the start? 1

2 The following shows you a little more see how the model is set up? The changeable inputs in this model can be found in the customer information section. These are the elements of the model that the user will change every time a new application is processed. In general, inputs are placed at the top of a model or another place where they would be easy for the user to spot and modify. Intermediate Calculations section of a spreadsheet model comprises the area of the worksheet where the logical steps required to complete the process are modeled. Model outputs represent the outcome of the process that is modeled in the spreadsheet. Outputs need not be a single calculation or recommendation, but they are the end-state of the model. Often model outputs are placed at the bottom of the spreadsheet model, because most people work in a top-down manner for completing a calculation. In our example of the mortgage underwriter, the output is the recommendation to approve or not approve the loan. Questions to ask when building a model What does the model need to accomplish? How much detail does the model need to show? From where does the data for the model come? Who else might provide insight into the process being modeled? Will others be using the spreadsheet model? Can the spreadsheet model be divided into smaller models? (Sometimes combining the results of smaller models can be a helpful strategy for building a more complex model.) How will you evaluate the effectiveness of the spreadsheet model once it is built? How can you make modeling easier? Look at what is there How do you make the model useful? Visual assistance Identify input area with a color Add data validation rules Valid marital status from a list Reasonable hours worked from a test Unlock the input area Protect the worksheet Data can only be changed in the unlocked areas Your formulas are protected Your data tables are protected 2

3 What are scenarios? When you are not sure what values the independent variables (inputs) will take on, you can come up with several sets of values called scenarios. A scenario usually reflects a certain business strategy Spend a lot on advertising, no discounts No advertising, lots of discounts Etc. You compare the outcomes of different strategies (scenario) to see what the model says. Allows for more informed decisions to be made. Scenario Manager allows you to specific various combinations of inputs (scenario) and then have Excel output the results of that information to you. Look at the example below, the INPUTS are outlined in GREEN. The OUTPUT is outlined in RED. Now that you know which values are the input and which is the output, you can then create (or have given to you) the various values you want to run through the scenario manager. Each Scenario substitutes out the input values, and then records the output value. You specify this information in the Scenario Manager dialog box. After you run Scenario Manager, you will receive the Scenario Summary. This is what you look at to make your decision. In the case below, Scenario 4 gets the closes to 0 (which is what we were looking for). What is Goal Seeking? Goal seeking takes a model you have created along with a value for a dependent variable (desired outcome). Model tells you what value of one of the independent variables is needed to achieve the outcome. This essentially reverses the role of independent and dependent variables. Lesson 6 Basic Modeling (Goal Seek) Goal Seek attempts to find an input value from an output value you are looking for. Think of it this way you want to know how many widgets you need to sell to make a profit of $ Instead of calculating 1 widget * price of widget = $2, 1 widget * price of widget = $4 (playing with the inputs) You can use Goal Seek to say, find the value when profit = $500 by changing the input cell of # of widgets. 3

4 Lesson 6 Basic Modeling (Goal Seek) Example: You want to know what price will achieve a surplus/shortfall of 0 (break even). You use Goal Seek to find when Surplus/Shortfall = 0, what the price is. Excel automatically goes through and does all the calculations for you. What is a data table? Using data tables, we can specify a number of different possible states for one or two input variables and construct a table in our worksheet that calculates an outcome for our model based on each state of the input variables. swaps out one input Two-way data table swaps out two inputs in various combinations and reports back the value achieved. A one-way data table allows you to substitute in a set of values, and then receive back the output you are looking for. When setting up a one-way data table, in the top right cell, you need to select the output you want examined (i.e. =C10) After you input the cell you want examined, you select the entire data table, and run the data table wizard. In this example, our data we want to substitute out is in a column, so we input the cell reference we want to swap out for each value in the column into the Column Input Value, in this case it is C7 (Price Input). Two-way data tables are use the same concept, but instead of just one input being changed out, you do two. Excel then produces the results from each combination of values. 4

5 One change that you need to remember is that you put the output cell in the top left of a two-way data table not the top right (as in a one way data table). Since are swapping out two inputs, when you run the Data Table wizard, make sure you select the right input for the data that is in the row (Advertising Budget in this case) and column (price in this case). Lesson 6 Test Your Skills Assignment Hint The toughest question is the Federal Tax Rate. Think about what you want to do, what information you have, and what useful functions you have learned in the past few lessons. Hint this requires you to look at a piece of information, figure out IF something is a certain value then LOOKUP a value in a specific data table. Lesson 6 Practice Problems Make sure to go through all of Lesson 6 and work through the practice problem. Modeling will be tough at first, but practice makes perfect. 5