Excel Forecasting Tools Review

Transcription

1 Excel Forecasting Tools Review Duke MBA Computer Preparation

2 Excel Forecasting Tools Review Focus The focus of this assignment is on four Excel 2003 forecasting tools: The Data Table, the Scenario Manager, Goal Seek, and the Solver. Practice with some of Excel s forecasting functions is also included. Skills The One-Input and Two-Input Data Tables Creating and managing Scenarios Goal Seek Excel Solver basics Some functions for forecasting The File You Need Download the file named ExcelForecasting.xlsx from the class Review Files web page. Deliverable Complete the Excel Forecasting Tools Review online quiz. Notes For your convenience the description of this assignment is divided into these sections: Completing the Review: Summary Descriptions A short description of the assignment requirements, useful if you are already familiar with the core skills. Completing the Review: Detailed Descriptions A more detailed description of the assignment tasks and techniques, useful if you are unfamiliar with the assignment topics. You may find it helpful to have a good Excel reference guide on hand or to become familiar with Excel s online help. A Skills Review Summary for this Assignment

3 Excel Forecasting Tools Review Table of Contents Page Excel Forecasting Review exercises Summary Descriptions Task 1: The One-Input Data Table... 1 Task 2: The Two-Input Data Table... 1 Task 3: Scenario Management... 1 Task 4: Goal Seek... 2 Task 5: Excel Forecasting Functions... 2 Task 6: Excel s Solver... 2 Excel Forecasting Tools Review exercises Detailed Descriptions Overview of Tools... 3 Task 1: The One-Input Data Table... 4 Task 2: The Two-Input Data Table... 8 Optional Additional Notes on the Data Table Task 3: Scenario Management Task 4: Goal Seek Task 5: Excel Forecasting Functions Task 6: Excel s Solver Excel Forecasting Tools Skills Summary Rev

4 Excel Forecasting Tools Review: Summary Descriptions Excel Forecasting Tools Review exercises - Summary Descriptions Task 1: The One-Input Data Table Open the ExcelForecasting07.xlsx file and make current the Task 1-One-Input Data Table worksheet. 1. Create a one-input data table (with inputs down a lefthand column) referencing the model s PMT function to calculate monthly payments for interest rates varying from 6.00% to 10.00% in quarter percent increments. 2. Format the column inputs to display as percentages with two decimals. 3. In the model on which the One-Input Data Table is based the loan amount is initially set to $100,000 and the term is initially set to 30. Change the loan amount to $300,000 and the term to Format the One-Input Data Table results as currency with two decimal places. Display the results as positive numbers. Task 2: The Two-Input Data Table Make the Task 2-Two-Input Data Table worksheet current. 1. Create a Two-Input Data Table to track Operating Income (Cell D29) when Units Sold inputs vary from 800, 900, 1500 and Price per Unit inputs vary from $88, $90, $98. Locate the Units Sold inputs down the Data Table column and the Price per Unit inputs across the Data Table row. 2. Format the row inputs to display as currency with no decimals. 3. Format the Two-Input Data Table results as currency with no decimals. Display negative results in parentheses and in red. Task 3: Scenario Management Use the Task 3-Scenarios worksheet in the ExcelForecasting07.xlsx file. 1. Assign these range names: Cells D6 - Interest Rate Cell D7 - Term in Years Cell D8 - Loan Amount Cell D9 - Monthly Payment 1

5 Excel Forecasting Tools Review: Summary Descriptions 2. Use Excel s Scenario Manager to create three scenarios in this worksheet using the scenario names and values shown below. In your three scenarios, make Interest Rate (Cell D6) and Term in Years (Cell D7) the changing cells. 3. Generate a scenario summary report with Monthly Payment as the result cell. Display the scenario summary report in its most detailed form. Task 4: Goal Seek On the Task 4-Goal Seek worksheet make the Payment value the set cell and make the Loan Amount value the changing cell. Run Goal Seek and specify the set cell at $3,500. Task 5: Excel Forecasting Functions Use the Task 5-Functions worksheet. 1. Use the specified Excel logical, mathematical or statistical function to answer each of the five questions on that sheet. Do not use functions other than those specified as you write your formulas. 2. Locate each formula in the space on the worksheet provided for its answer. Task 6: Excel s Solver The model in the Task 6-Solver worksheet is a production model for a company that produces cell phones, electronic music players, and electronic organizers using a common parts inventory of circuit boards, LCDs, batteries, etc. The model shows the available components on hand (Column C). Cell phones yield $50 profit, music players $100, and organizers $150. Use Solver to find the best combination of products to build to maximize profit. Solver suggests this mix of products to maximize profit: 0 Cell Phones 200 Music Players 250 Organizers Solver s recommended combination of products yields a Total Profit of $57,500. End of the Excel Forecasting Tools Review Summary Task Descriptions 2

6 Excel Forecasting Tools Review exercises - Detailed Descriptions Overview of Tools The Data Table (One-Input and Two-Input) A Data Table is a range of cells that record how changing certain values used in a spreadsheet model s formula(s) affect the results of the formula(s). Data Tables are a shortcut for calculating multiple model outcomes in a single operation and a way to view and compare the results of all of the different outcomes together in a condensed space on a single worksheet. A Scenario A Scenario is a set of values that Excel saves and can substitute on command in a worksheet model to display the model with those values. Using a scenario you can create and save different groups of values in a single worksheet and then switch to any one of these sets to view different model outcomes. For example, if you want to create a budget worksheet but are uncertain what revenue value to include, you can define several scenarios, each with a different value for the revenue. Then switch between the scenarios to see each revenue figure in context and as it affects the rest of the model. Goal Seek (vs. Solver) When you know the result you want a formula to provide but you don t know the input value the formula needs in order to return that result, use Excel s Goal Seek. Goal Seek varies the value in the cell you specify until your formula (that is dependent on that cell) returns the result you want. Of course, Excel s Solver is more powerful; it permits you to change more than one cell used in the formula and to specify one or more constraints. Solver adjusts the values in the cells you specify to produce the best possible result from the formula. However, if your problem is straightforward, the simpler Goal Seek tool may prove useful. Solver Excel s built-in Solver allows you to find an optimal value for a formula in a target cell on a worksheet. Solver works with a group of cells that are related, either directly or indirectly, to the formula in the target cell. Solver adjusts the values in the changing cells you specify to produce the result you specify from the target cell formula. You can apply constraints to set limits on the values Solver can use in the model. The constraints can refer to other cells that affect the target cell formula. The Solver automates finding a good answers for what otherwise would be tough problems. 3

7 Task 1: The One-Input Data Table Open the ExcelForecasting07.xlsx workbook and make current the worksheet named Task 1- One-Input Data Table. This worksheet uses an amortization problem to illustrate the use of a One-Input Data Table for forecasting. In this task, forecast monthly payment amounts at varying interest rates. In addition, modify the term and loan amount to see the effect of those changes on the monthly payment. Excel s PMT function is located in Cell C11. This built-in function calculates the payment for a loan based on constant payments and a constant interest rate. Excel s PMT function The PMT function syntax is: =PMT(rate, nper, pv) where rate is the interest rate on the borrowed funds. It indicates the percentage rate per payment period. For monthly payments the figure is divided by 12. nper is the number of payment periods of the loan. Assuming monthly payments, this is the number of years of the loan X 12. pv is the amount of money borrowed at the beginning of the transaction. In the illustration above, the Monthly payment cell has this formula 1 entered for you: =-PMT(C8/12,C9*12,C10) A One-Input Data Table is a range of cells that record how changing certain values used in a spreadsheet model s formula affect the results of the formula. The Data Table is a shortcut for calculating multiple model outcomes in a single operation. 1 The minus sign in front of the PMT function name causes the monthly payment to display as a positive number. 4

8 The basic model is again shown at left. Monthly payment is calculated using Excel s PMT function. As described above, the PMT function uses interest rate, term, and loan amount as input values. Task Overview Using the model in the worksheet, create a One-Input Data Table to see the effect on the monthly payment for an interest rate that varies from 6.00% to 10.00% in quarter-percent increments. Format these inputs to display as percentages with two decimal places. Format the Data Table results to display as currency with two decimal places. Change the model loan amount to $300,000 and the model term in years to 15. The One-Input Data Table results values should change to reflect these new model inputs. Details follow. Establish the One-Input Data Table Column Input Values Begin creating the One-Input Data Table by listing below the worksheet model the interest rate values you want the Data Table to substitute into the model to calculate various monthly payments. List the interest rate values in a column, from 6.00% to 10.00% in quarter-percent increments. Drag down Fill box The most efficient way to enter the inputs is to enter the first two interest rate values into the worksheet (6.00% and 6.25%). Select the cells holding both those values and then to use the fill box at the lower-right-hand corner of the 6.25% cell to drag down the column to fill the range to 10.00%. Excel recognizes the interval between the first two values you enter and uses that same interval in the fill range you specify. Your list of inputs should look like the illustration at right. FYI: The One-Input Data Table input values can be listed across a row instead of down a column. The column-orientation is the most common one, however, and is the one described here. 5

9 Establish the One-Input Data Table Model Formula The next step in constructing a One-Input Data Table is to locate a copy of the model formula to track in the Data Table structure. In this task, the model formula is the PMT function in Cell C11. In the One-Input Data Table, the formula must be located one column to the right of the input values and one row above the input values. Either re-enter the PMT function in your Data Table cell or enter in that cell a reference to the model cell that holds the formula. In the example below, the reference formula =C11 is entered into Cell D14. The unvarying location of the One-Input Data Table formula. There are two ways a formula can be added to a One-Input Data Table structure. One is to copy the formula from the model; that is, copy the PMT function in Cell C7. A second technique is to simply reference the cell in the model that holds the formula. To do that, enter the formula =C7 in the Data Table s formula cell (E9 in the illustration at left). Run the One-Input Data Table Unlike many of Excel s other data analysis features (such as regression, descriptive statistics, etc.) the Data Table is not part of the Data Analysis Toolpak. Instead, after constructing the Data Table, run it by selecting its structure, selecting menu commands, and answering one prompt. 1. Select the range that includes all the input values, the blank cell above the input values, the formula, and the blank cells below the formula to the right of the input values. 2. From the Data tab find the Data Tools group and click the What-If Analysis button. From the drop-down that displays choose Data Table... to open the Data Table dialog. 6

10 3. In the Data Table dialog, indicate the cell that holds the model value into which your Data Table input values should be substituted. In this example, the input values are a range of interest rates, so the Column input cell prompt in the Data Table dialog holds a reference to the model cell C8. This is the model cell that holds the interest rate. If you point-and-click to indicate Cell C8 when completing the Table dialog, Excel automatically makes the reference absolute. Important For the One-Input Data Table Table dialog, complete only one of the two prompts (here, column input). The Column input cell prompt is used here because the input values are arranged down a column. The Row input cell prompt is left blank. 4. Click OK to execute the One-Input Data Table. Excel fills the empty cells to the right of the column inputs with monthly payment values. Each monthly payment value in the completed Data Table corresponds to the value monthly payment would take on were the interest rate to its left entered into the interest rate cell in the model. Because in the preexisting model the PMT function is preceded by a minus sign, the Data Table result values display as positive numbers. 5. Format the Data Table results as currency with two decimal places. The formula Task 1 Intermediate Check Your initial One-Input Data Table result should look like the illustration at right. Read the Data Table results like this: With interest at 6.00%, monthly payment on the specified loan would be $ With interest at 10.00%, monthly payment on the specified loan would be $ And so on. In a compact space and with very little effort you have a record of how monthly payments vary as the interest rate varies. The input values The result values 7

11 Modify the Model Term and Loan Amount Changing term and loan amount values in the model cause the Data Table values to update automatically. Once your Data Table is constructed and working properly, make these two changes to the model: 1. Change the loan amount in the worksheet model (Cell C10) from $100,000 to $300, Change the term in years (Cell C9) from 30 to 15. You need not rerun the One-Input Data Table. Excel automatically updates the Data Table results based on the new model values. Task 1 Final Check With the changes to the two model values, the Data Table should now display the values shown in the partial view at right. Changed model values Updated Data Table values End of the Task 1 Detailed Description Task 2: The Two-Input Data Table The Two-Input Data Table can contain only one formula. However, as its name implies, the Two-Input Data Table supports two sets of input variables instead of one. The layout of the Two-Input Data Table differs, of course, from that of the one-input. The Two-Input Table has one set of input values down its left-hand column and another set of input values across its top row. The Table s single formula must be located in the cell that is the intersection of the Table s left column and the Table s top row. 8

12 As with the One-Input Data Table, the formula in the Two-Input Data Table must relate to the model. In the case of the Two-Input, the formula must directly or indirectly reference both the column and row inputs to the Data Table. The inputs represent model values that are sequentially replaced by Data Table values to produce the Data Table value results. Make the Task 2-Two Input Data Table worksheet current. In this task, the model is a monthly income statement for a small business. You build a Data Table with varying combinations of Price per Unit and Units Sold to track their effect on the model s Operating Income. A monthly income statement for Triangle Widgets, Inc. The Units Sold value is in Cell D11. This is the Data Table column input to vary. The Price per Unit value is in Cell D12. This is the Data Table row input to vary. The Operating Income is in Cell D29. This is the Data Table value to track. Establish the Two-Input Data Table Column Inputs To the right of the monthly income statement in the Task 2-Two Input Data Table worksheet, establish down a column a range of values that vary from 800 to 1500 in 100-unit increments. Your range should look like the one at right. When you run the Data Table, these are the inputs that your Data Table will substitute into the model in place of Units Sold, Cell D11. 9

13 Establish the Two-Input Data Table Row Inputs Establish the 2 nd set of inputs to the Data Table. These inputs will be located across what becomes the top row of the table. Their location is important: They must be arranged one column to the right of the column inputs and one row above the first column input. Set the values to range from $88 to $98 in increments of 2, as shown below. Establish the Two-Input Data Table Formula The Two-Input Data Table s single formula must be located in the cell above the first column input and to the left of the first row input. For this task, reference the Operating Income cell (Cell D29) in the model. The illustration below shows the Two-Input Data Table with the reference to Cell D29 in place. The highlighted (selected) area to the right of the input column and below the input row shows where results will display after the table is run. (Note that this is not the area to select before running the Two-Input Data Table.) Recall that the model formula used in a twoinput Data Table must reference (either directly or indirectly) both the Data Table column inputs and the Data Table row inputs. Note You may find it helpful here to turn on the Formula Auditing toolbar and use the Trace Precedents tool for the formula s Operating Income cell. The Trace Precedents arrows show the Operating Income calculation depends indirectly on both the Units Sold and Price per Unit model values. 10

14 Run the Two-Input Data Table 1. Select the entire Two-Input Data Table range. That is, the formula, the column of inputs, the row of inputs, and the blank cells to the right of the column and beneath the row. Your selection should look like this: 2. On the Data tab find the Data Tools group and click the What-If Analysis button. From the drop-down menu that displays choose Data Table... to open the Data Table dialog. 3. Complete the Data Table dialog as show below. That is, associate the Data Table row inputs with the Price per Unit model value (Cell D12) and associate the Data Table column inputs with the Units Sold model value (Cell D11). Click OK to run the Data Table. With the Two-Input Data Table, both input cells are identified. Task 2 Intermediate Check The initial Two-Input Data Table will generate the results values shown below. 11

15 Notice that the results values quickly show the combinations of Units Sold and Price per Unit that produce negative Operating Income values. Format the Data Table Results As your final step for this task, format the results to display as currency with negative numbers shown in red and with parentheses around them instead of a minus sign. Check for Task 2 Your completed Two-Input Data Table will look like this: End of the Task 2 Detailed Notes 12

16 Optional Additional Notes on the Data Table In order to appreciate the power of the Data Table it s important to understand that a Data Table can use input values that are not used directly by the formula or formulas referenced by the data table. In the example below, the simple Sale + Tax formula makes direct use of inputs to its left: There is no need to construct a Data Table since creating a master formula in Cell C3 and copying it down Column C works perfectly well. In our task, however, attempting to track the effect of Price per Unit and/or Units Sold on Operating Income using some simple arrangement like the example above would not work. Operating Income is calculated as Total Revenue Total Expenses. Price per Unit directly affects Total Revenue but only indirectly affects Operating Income. The same thing is true with Units Sold. Again, the tools on the Formula Auditing toolbar can graphically show precedents and dependents and display formulas in the worksheet so the data relationships are more clear. End of Optional Additional Notes 13

17 Task 3: Scenario Management A Data Table summarizes how a change in one or two values affects other values in a model. In this task, you use a similar summary tool for what if analysis. However, instead of showing the changed values in a table (Data Table) format, this tool displays a number of possible model variations as different worksheet scenarios. This method has the advantage over the Data Table of allowing a viewer to see the changes in the worksheet model in context, offering a more complete picture of the model outcome. Scenarios can be particularly useful after a more extensive analysis of many possibilities (perhaps with a Data Table) to focus on just a few of the most interesting ones. For this task, use the Task 3-Scenarios worksheet in the ExcelForecasting07.xlsx file. This worksheet contains the basic loan/payment model you worked with in Task 1. As you ve seen with this model, the Monthly Payment amount changes if different values are entered for Interest Rate, Term in Years, and/or Loan Amount. Perhaps you want to focus on three particular combinations of two of the variable values: Interest Rate and Term in Years. If you use Excel s Scenario Manager to create a scenario for each combination, you can display each scenario in turn by choosing that scenario s name from a list. The less-convenient alternative is to type new values in the model cells by hand to see a particular view of the model. For a small model with few changing variables, entering a different set of values by hand might seem trivial. The Scenarios worksheet here, for example, contains a very small model. But the Scenario Manager can be used in more complex models with many more variables. If you have multiple scenarios to review for a single model and each scenario has many changing cells, then using Excel s Scenario Manager can save lots of effort. Below are the names and values for the three scenarios to build for this task. Assign Range Names to the Model Cells Because the Scenario Manager will use range names if they re available, the first step in this task is to range-name the four model value cells: Interest Rate, Term in Years, Loan Amount, and Monthly Payment. The model values already have labels in the cells at left, so use Excel s Create Names feature to add range names for these cells. Notes follow. 14

18 1. In the worksheet select the model cells and the labels to their left (C6:D9). 2. Click the Formula tab and find the Defined Names group. 3. Click the Create from Selection button in that group. 4. In the Create Names from Selection dialog, accept the Left column suggestion Excel makes. Click OK. Excel automatically assigns each model value a range name using the label to its left. In the range name Excel assigns, any spaces in label names are replaced by underscores. Tip Check the names Excel has created by clicking the Name Manager button on the Defined Names group of the Formulas tab. Partial view. 15

19 Build the Three Scenarios Begin creating a scenario by choosing Tools, Scenarios to open the Scenario Manager dialog. Click the Add button to add the first scenario. Follow the Scenario Manager prompts. For example: 5. Click the Data tab and find the Data Tools group. Click the What-If Analysis button and from the drop-down that displays choose Scenario Manager... The Scenario Manager dialog opens. 6. Click the Add button to open the Add Scenario dialog. 7. In the Scenario name box, enter the Scenario 1 name, Long Term High Interest. In the Changing cells box, indicate the model cells whose values this scenario will change. These model values are Interest Rate and Term in Years ; that is Cells D6:D7. 4. Click OK to open the Scenario Values dialog. 16

20 5. In the Scenario Values dialog, Excel prompts for values for the cells you identified as changing cells. Because earlier you assigned range names to these cells, Excel uses those names in the dialog instead of using cell references. To define the Long Term High Interest scenario, enter 12% (or 0.12) for Interest Rate and 30 for Term in Years. When you run the scenario, these are the values Excel substitutes into the model to calculate Monthly Payment. Click OK. 6. Excel returns you to the primary Scenario Manager dialog. This time, your scenario named Long Term High Interest is listed. 7. In the Scenario Manager dialog click the Add button to begin building the second scenario and proceed as described above. 8. Use the same process to build the third scenario. Task 3 Intermediate Check When finished defining scenarios, your complete list of scenario names displays in the Scenario Manager dialog. 2 Use the Scenario Manager dialog to display any scenario you ve defined. Select a scenario name from the list and click the Show button. Excel changes the scenario s changing cells to the values that belong to that scenario. The worksheet model automatically changes to reflect the impact of those new values. 2 To edit an existing scenario, select its name in the list and click the Edit button. To delete a scenario, select its name in the list and click the Delete button. 17

21 Generate a Scenario Summary Report Now, compare all three scenarios by generating a summary report. 1. On the Scenario Manager dialog click the Summary button. The Scenario Summary dialog opens. 2. Choose Scenario summary and identify the Monthly Payment cell (Cell D9) in the model as the Result cell. That is, Monthly Payment will be the tracked cell. Although in this exercise we identify only a single Result cell, for a complex model you could identify more than one. 3. Click OK to generate the summary report. The report is generated on a new worksheet named Scenario Summary. The summary displays any cells you identified during scenario creation as changing cells and shows their values under each scenario name. The summary also displays the cell or cells you asked to track as result cells, and shows their values under each scenario. The outline view permits displaying or hiding detail. Task 3 Check The illustration below shows the summary of the three scenarios and their effect on Monthly Payment. Notice that Excel also automatically records and displays the model s original values, under the label Current Values. Changing cells effect on Monthly Payment values. End of the Task 3 Detailed Description 18

22 For Your Information Selecting Scenario PivotTable report as your scenario summary produces a Pivot Table like the one illustrated below. Task 4: Goal Seek When you know what you want a formula s result to be and you want Excel to find the value the formula needs to get that result, use Goal Seek. With Goal Seek, Excel varies the value in a cell you specify until your formula (dependent on that cell) returns the value you want. In the ExcelForecasting07.xlsx workbook look at the worksheet named Task 4-Goal Seek. The simple model on that worksheet again uses Excel s PMT function to calculate a monthly payment using interest rate, term, and loan amount as inputs. 1. Again click the Data tab and find the Data Tools group. Click the What-If Analysis button. From the drop-down menu that displays choose Goal Seek

23 2. In the dialog, specify the model s Payment amount (Cell C11) as the set cell. 3. For To value enter Specify the model s Loan Amount 3 (Cell C10) as the changing cell. 5. Click OK. Excel finds the value for the changing cell (Loan Amount) that results in the Payment amount you designated as the To value (3500). Excel displays a Goal Seek Status dialog that gives you the chance to either accept the change Goal Seek proposes (click OK) or to cancel. Click OK. Task 4 Check The new Loan Amount in the model after the Goal Seek operation will be $366,242. End of Task 4 Detailed Description 3 You can only specify one changing cell when using the Goal Seek. In contrast, the much more powerful Solver allows you to specify multiple changing cells as well as constraints. 20

24 Task 5: Forecasting Functions The Task 5-Functions worksheet contains five questions. In this task, use the specified Excel logical, mathematical, and statistical functions (SUMIF, IF, and MIN) in the formulas you write to answer each of the questions. Locate each formula you write in the space on the worksheet provided for its answer. If you re unfamiliar with a function s syntax, begin entering the function. Excel displays a pop-up note with a prompt. For example, in the illustration below, a SUMIF function is being entered in Cell D13. Excel prompts for the function s parameters. Important In writing your formulas, please use the functions specified in the questions. That is, SUMIF for questions 1 and 2, IF for question 3, and MIN only for questions 4 and 5. Task 5 Check At right are the correct answers to the questions, shown in context on the worksheet. Your completed worksheet should show these same values. However, as I examine your worksheet I should be able to view the formulas you used to derive these values. Use the illustration at right only to check your work. End of the Task 5 Detailed Instructions 21

25 Task 6: Excel s Solver Excel s Solver finds an optimal value for a formula in a target cell on a worksheet. Solver works with a group of cells that are related, either directly or indirectly, to the formula in the target cell. Solver adjusts the values in specified changing cells to produce a specified result from the target cell formula. Constraints can be applied to restrict the values Solver can use in the model and the constraints can refer to other cells that affect the target cell formula. Solver is a built-in component of Excel and is packaged as an add-in. Where to Find Solver Click the Data tab and go to the Analysis group. Solver is a button in that group. If You Can t Find Solver If you don t find Solver as described above, you have either not installed it on your computer or you have not turned it on as an add-in. Open Excel s Add-Ins dialog by: 1. Clicking the Home button and the Excel Options button at the bottom of the file list that displays. The Home button. 2. In the Excel Options dialog click the Add-Ins button. 3. At the bottom of the dialog choose Excel Add-Ins from the Manage option that displays. Click the Go...button. 22

26 4. Excel displays its Add-Ins dialog. Look for Solver Add-in in the list of available add-ins. If it s listed, turn it on by clicking the box to the left of it. Then click OK to return to Excel. If you do not find Solver Add-in in your Add-Ins dialog, that means the add-in was not installed when Excel was installed. If this is the case, go back to your Excel installation medium and rerun the Excel install program. You need not reinstall Excel entirely, but you must go through the Excel installation options to include the Solver add-in. Then go through the Add- Ins dialog process described above to turn Solver on as an add-in. An Overview of the Model for this Task The model in the Task 6-Solver worksheet is the layout for a production model for a company that produces cell phones, electronic music players, and electronic organizers using a common parts inventory of circuit boards, antennae, LCDs, batteries, etc. Cell phones yield $50 profit, music players $100, and organizers $150. In this task you use Solver with this model to let Solver find the combination of products to build that maximizes Total Profit. 23

27 The existing model layout shows: The names and numbers of components currently on hand (B11:C16). The number of components currently used (Column D; all zeros). Space to enter the decision variables; that is, the number of cell phones, music players, and organizers to build (E10:G10). This range is named Number_to_build. When you open the model the cells in the Number_to_build range are all set to zero. Constraints: a) The number used ( No. Used, Column D) must be less than or equal to the number on hand ( On Hand, Column C). These two ranges are named Number_used (D11:D16) and Number_available (C11:C16). b) The Number_to_build (E10:G10) must be greater than or equal to zero. 4 Notes on using Solver to maximize total profit follow. Build the Formulas You Need Start by building the formulas you need into the model. 1. Total Profit (Cell C7) is the value to maximize. Write this as the sum of the By Product profit values in Cells E19:G19. 4 Use Solver s Assume Non-Negative option, described in the notes below. 24

28 2. Calculate the number of each part used (Cells D11:D16) with a SUMPRODUCT function that multiplies the Number_to_Build by the corresponding values in Columns E, F, and G in the same row. For example, for the circuit board component, one circuit board is required for each cell phone built, one for music player built, and one for each organizer built. The SUMPRODUCT function in Cell D11 would be: =SUMPRODUCT(Number_to_build, E11:G11) This formula uses relative addressing for E11:G11. So if the formula is copied down its column, the second instance will show E12:G12, the third E13:G13, and so on. However, the range name for Cells E10:G10 ( Number_to_build ) is treated as an absolute reference by Excel. This is appropriate, since in any copied formulas that reference number-to-build should always reference those particular cells. 3. Build three Profits by Product formulas in Cells E19:G19. Construct the formulas as profit earned for a product multiplied by the quantity of that product produced. That is: Profit for Cell Phones: $50 X Number produced (Cell E10) Profit for Music Players $100 X Number produced (Cell F10) Profit for Organizers $150 X Number produced (Cell G10) With formulas displayed: 4. The Constraint Check area (Cells I11:I16) is a set of IF calculations already completed for you. For each component, an IF statements checks to see whether the number of that component used is less than the number on hand. (Attempting to use more components than are on hand displays an Infeasible message.) 25

29 This part of the model is helpful when the model is being solved manually. However, once Solver is applied to the model, constraints we build into Solver s processing take the place of these formulas. At that point, the calculated constraint checks are no longer useful and can be erased. Optional: Troubleshooting the Constraint Check You may find that the constraint check area displays one or more Infeasible messages when the check of the number on hand and the number used should result in an OK message. That s the case with the first two entries illustrated below. The reason for this seeming error in the results of the IF statements is due to precision or the degree of accuracy for a calculation. Excel stores and calculates numbers with 15 significant digits of precision. You may find that Solver returns values for one or more of the Number_used cells (Column D) that cause an "invalid" flag in the Constraint Check column (Column I). The Constraint Check column is primarily there for you as you try to find the optimal Total Profit by manually entering values into the model. Still, it can be a bit disconcerting for an error to display after Solver has had its chance to find a Total Profit value. Here's an example of what can happen to cause an error flag: Part name: Circuit Board Number on hand: 450 Number the Solver solution requires: Constraint check formula: =IF(D11<=C11, "OK", "Infeasible") Constraint check result: Infeasible Do not be concerned if you get Infeasible messages in your Constraint Check column with your version of Solver's solution if they are due to this kind of situation. Manually Find the Optimal Number to of each Product to Produce Enter likely values into the Number_to_build cells of the model (Cells E10:G10) and see how the numbers you enter affect the Total Profit calculation in Cell C7. Also note whether or not the contents of the Constraint Check column indicate any problems with your Number_to_build values. 26

30 For example, in the illustration below, the production of 1,000 cell phones, zero music players, and zero organizers results in $50,000 total profit but is infeasible for all the constraint checks. Some different product mix might be feasible as well as more profitable. Experiment with different Number to Build values until you have satisfied yourself that even in this small and straightforward model, attempting to find the values to optimize Total Profit might be time consuming. This is an ideal model problem to hand over to Solver, since Solver can run through many product mix scenarios quickly and automatically and suggest the best one. Run Solver to Find the Optimal Product Mix Click the Data tab and the Solver button in the Analysis group to open the Solver Parameters dialog. Complete the dialog so as to maximize the Total_profit cell. Allow Solver to change the Number_to_build cells (E10:G10). Enter appropriate constraints. For example, make sure that Solver is aware of the constraint that the Number_used must be less than or equal to the Number_available. 27

31 The range names already assigned in the Task 6-Solver worksheet are being used to complete the dialog illustrated above. How to Add a Constraint: Add a Solver constraint by clicking the Add button in the Solver Parameters dialog and completing the Add Constraint dialog that displays. The illustration below limits Solver s solution to production numbers that do not require more than the number of parts on hand. This constraint limits the number of products to build to integer values. You must also specify to Solver that these integer values must be >=0. Setting Solver Options: Click the Options button on the Solver Parameters dialog to open the Solver Options dialog shown below. At the lower left of this dialog, check Assume Non- Negative. The alternative to using this option is the constraint Number_to_build >=0, shown in the Solver dialog illustrated above. Use either method. 28

32 Run: Click the Solve button from the main Solver dialog to run the Solver with the specified parameters and constraints in place. When Solver finds a solution, the Solver Results dialog displays. Leave the Keep Solver Solution radio button selected and click OK to let Solver implement its solution in the model. Task 6 Check Solver suggests this mix of products to maximize profit: 0 Cell Phones 200 Music Players 250 Organizers Solver s recommended combination of products yields a Total Profit of $57,500. It s interesting to note the number of components required to implement this recommendation and the number of components left on hand. End of the Detailed Notes for Task 6 End of Excel Forecasting Tools Review Detailed Descriptions 29

33 Excel Forecasting Tools Review Skills Summary Excel Forecasting Tools Review Skills Summary The Excel Data Table The Excel Data Table is a range of cells that record how changing certain values used in a spreadsheet model s formula(s) affect the results of the formula(s). Data Tables are a shortcut for calculating multiple model outcomes in a single operation and a way to view and compare the results of all of the different outcomes together in a condensed space on a single worksheet. A Data Table is either of the One-Input or the Two-Input variety. A One-Input Data Table can have multiple formulas but only one input. A Two-Input Data Table can have only one formula but two different inputs. Construct, Run, & Interpret a One-Input Data Table CONSTRUCT: Start with a model that has one or more values you want to vary to see their effect on another model value. In the example below, monthly payment on a loan depends on interest rate, term, and loan amount. Monthly payment is calculated using the PMT function. Model One-Input Data Table Structure To determine the effect of different interest rates on monthly payment, list the interest rates to test down a column in an empty part of the worksheet. Then one column over and one row above, reference the model cell you want to track. In the example above, the model cell the data table tracks is monthly payment (currently $277.78). RUN: Select the range that includes the column range of data table input values, the empty cell directly above that range, the model reference cell, and all the blank cells below the model reference cell to the right of the data table input values. From the Data tab choose the Data Tools group and the What-If Analysis button. From the drop-down that displays, choose Data Table. 30

34 Excel Forecasting Tools Review Skills Summary Complete the Table dialog by entering a reference in the Column input cell prompt that indicates what model cell will accept the data table input values as the data table runs through all the input possibilities. Leave the Row input cell prompt empty. Click OK to run the data table. INTERPRET: When executed, the one-input data table systematically substitutes into the specified model cell each value in the data table input column. On each iteration, the data table records the model result when that data table input is in the model. The recorded results appear in the data table to the right of their input value. In the illustration at right, when the interest rate is 6% the model shows monthly payment at $ When the interest rate is 8%, the model shows monthly payment at $733.76, and so on. ONE-INPUT DATA TABLE NOTES: A one-input data table can have multiple formulas across its top row. Each formula must in some way reference the input value down the data table s left-hand column. Construct, Run, & Interpret a Two-Input Data Table CONSTRUCT: Although the basic idea and function of the two-input data table is the same as for the one-input, the two-input data table has a different layout that differs from the one-input. As its name indicates, the two-input data table has one set of inputs down its left-hand column and another set of inputs across its top row. It can have a single formula, which must be located in the cell that intersects the column and row inputs. The formula must be a reference to (or copy of) a model formula that uses the column and row input values. Model formula that uses both inputs. Another set of inputs across the top row. One set of inputs down the left-hand column. Area where the Data Table results will appear. 31

35 Excel Forecasting Tools Review Skills Summary RUN: Select the entire data table from the formula at upper left, across all row inputs, and down all column inputs. The empty range beneath the row and to the right of the column should be part of the selection. From Excel s menus choose Data, Table to open the Table dialog. Relate the data table column input to the model by indicating the model cell for which the data table column input values will be substituted. Relate the data table row input to the model by indicating the model cell for which the data table row input values will be substituted. Click OK to execute the data table. INTERPRET: Find the combination of column input and row input for which you want to see model results and read across that column and down that row of the data table. For example, at 6% interest monthly payment on a $150K loan is $1, An Excel Scenario An Excel Scenario is a set of values that Excel saves and can substitute on command in a worksheet model to display the model with those values. Use a scenario to create and save different groups of values in a single worksheet and then switch to any one of these sets to view different model outcomes. For example, if you create a budget worksheet but are uncertain what revenue value to include, define several scenarios, each with a different value for the revenue. Then switch between the scenarios to see each revenue figure in context and as it affects the rest of the model. Create and Use an Excel Scenario 1. Name model cells/ranges that will be used in the scenario. If labels are available, use them as range names. Click the Formulas tab and find the Defined Names group. Choose Create from Selection. 32

36 Excel Forecasting Tools Review Skills Summary 2. Click the Data tab and in the Data Tools group. Click the What-If Analysis button and choose Scenario Manager... to open the Scenario Manager dialog. 3. Click the Add button to open the Add Scenarios dialog and define a scenario name and the cells this named scenario will control. 4. Click OK to open the Scenario Values dialog. In this dialog enter values for the scenario-controlled cells. Click OK to return to the Scenario Manager dialog. 5. Add additional scenarios as desired using steps 2-4 above. 6. Display a scenario s values in the worksheet by selecting a scenario name from the Scenario Manager dialog and choosing the Show button. Defined scenarios are saved with a workbook. Excel s Goal Seek When you know the result you want a formula to provide but you don t know the input value the formula needs in order to supply that result, use Excel s Goal Seek. Goal Seek varies the value in the cell you specify until your formula (that is dependent on that cell) returns the result you want. Find Goal Seek in the Data Tools group on the Data tab, as one of the What-If Analysis tools. 33

37 Excel Forecasting Tools Review Skills Summary Complete the Set cell, To value, and By changing cell prompts and click OK. Goal Seek changes the changing cell in the model until the desired value is reached in the set cell, then displays the Goal Seek Status dialog Click OK to accept Goal Seek s solution. Some Forecasting Functions SUMIF syntax =SUMIF(range, criteria, [sum_range]) IF syntax =IF(condition-to-test, value-if-true, value-if-false) MIN syntax =MIN(number1, [number2], ) Excel s Solver Excel s built-in Solver (an add-in) allows you to find an optimal value for a formula in a target cell in a model. Solver works with a group of cells that are related, either directly or indirectly, to the formula in the target cell. Solver adjusts the values in the changing cells you specify to produce the result you specify (maximum, minimum, or specified value) from the target cell formula. You can apply constraints to restrict the values Solver can use in the model, and the constraints can refer to other cells that affect the target cell formula. Generate a model for which you want to maximize a value, minimize a value, or find a specific value. Click the Data tab and find the Analysis group. Click the Solver button in that group to start the Solver. 34

38 Excel Forecasting Tools Review Skills Summary The Solver Parameters dialog displays. In this dialog identify the model target cell, model cells whose values you will allow Solver to change, and any constraints. Set run-time options by clicking the Options button and completing the dialog that displays. Then return to the Solver Parameters dialog and click Solve to run. Solver iterates through possible changing cell values to satisfy any constraints and to maximize, minimize, or find a particular value in your model. Save or discard Solver s suggested changes to your model. Generate one or more Solver reports on its own new worksheet (Answer, Sensitivity, Limits) by choosing one or more report titles from the Reports list on the Solver Results dialog. Excel Numeric Precision Excel stores and calculates numbers with 15 significant digits of precision. The precision of calculations in a workbook can be changed from full precision (15 digits) to whatever format (including decimal places) is displayed. If the precision in a workbook is changed from stored to displayed values, however, it can not later be changed back. To change the precision of stored values click the Office button, choose Excel Options at the bottom of the dialog that displays, and choose the Advanced category. Scroll down to the When calculating this workbook section. Choose the workbook to act on, and then choose Set precision as displayed. End of Excel Forecasting Skills Review Summary 35