6 - 1 Chapter 6: Analysis Using Spreadsheets Management Science: The Art of Modeling with Spreadsheets, 3e S.G. Powell K.R. Baker © John Wiley and Sons,

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6 - 1

Chapter 6: Analysis Using Spreadsheets

Management Science: The Art of Modeling with Spreadsheets, 3e

S.G. Powell

K.R. Baker

© John Wiley and Sons, Inc.Power Point Slides Revised By: Tony Ratcliffe, James Madison University

Five Categories of Spreadsheet Analysis

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Base-case analysisWhat-if analysisBreakeven analysisOptimization analysisRisk analysis

A detailed analysis may include all of the above steps.

Base Case Analysis6 - 3

Base case can describe one or more of the following: Current policy, most likely scenario, best or worst

case scenarios

Answers questions such as: If we follow last year’s plan, how much profit should

we expect next year? How many items do we expect to sell next week?

What-if Analysis6 - 4

Analyzes how key outputs change with changes in one or more of the inputs

May vary a parameter, a decision variable, or the model structure

Also called sensitivity analysisAlso part of debugging process

If output is unexpected we have uncovered either a bug or an insight.

Varying a Parameter6 - 5

Asking what if given information were different

Tests numerical assumptions of modele.g., how much will profit change if our

product costs turn out to be 10% higher or lower than we have assumed?

Varying a Decision Variable6 - 6

Exploring outcomes we can influenceLeads us to better decisionse.g., how much will profit change if we spend

an extra $1000 on advertising in the first quarter?

Varying the Model Structure6 - 7

Tests key structural assumptions in modelMore complex than changes to parameters or

decision variablese.g., how does profit change if we change our

linear model of price and demand to a non-linear one?

Benchmarking6 - 8

Record base-case to compare to results of what-if analysis

Base case can be recorded by: Home►Clipboard►Copy Home►Clipboard►Paste►Paste Special with Paste

Values Option selected

The Paste Special Window6 - 9

Scenarios6 - 10

Sets of parameter values often go together.

A scenario is a set of parameter values that are internally consistent.

Adding scenarios Data►Data Tools►What-if Analysis►Scenario

Manager Enter the first scenario by clicking on the Add

button Enter the information required in the Add

Scenario window

The Scenario Manager Window6 - 11

The Summary Produced by the Scenario Manager

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CHOOSE Function6 - 13

When scenarios involve a large number of parameters it is convenient to be able to switch from one set of parameters to another all at once.

This can be accomplished using the Excel CHOOSE function.

CHOOSE selects a value from a range based on an index number. The index number is the number of the scenario and the range contains the inputs for a given parameter.

Use of CHOOSE Function to Implement Scenarios

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Data Sensitivity6 - 15

Tabulates output based on varying inputsFound in Sensitivity Toolkit add-inSteps

Select Sensitivity Toolkit – Data Sensitivity Choose table type One-Way or Two-Way Enter output to tabulate in result cell Click Next

One-Way Tables6 - 16

Cell to Vary is (single) input to varyInput Type: Begin, End, Increment

Will vary input from first value to last value in steps of size increment

Input Type: Begin, End, Num Obs Will vary input from first value to last value using N

steps

The One-Way Inputs For Data Sensitivity

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Two-Way Tables6 - 18

Allows two inputs to be variedWill output a two-dimensional table that

displays the output based on the varying values of the two input variables

Tornado Charts6 - 19

Measures the sensitivity of parameters defined in the modelDetermines how the output changes

based on changes in the inputsShows which parameters have a major impact on the results and which do not

Types of Tornado Chart6 - 20

Constant Percentage Will vary all parameters by a constant percentage

entered by the userVariable Percentage

Percentages can be different for all parameters. Should be entered in a column beside original

parameters10/90 Percentiles

Discussed in Chapter 9

Tornado Chart Window6 - 21

Cell value to evaluate

Cell inputs to vary (should be numbers)

Limitations of Tornado Charts6 - 22

There are potential pitfalls of assuming every parameter varies by the same percentage of the base case.

In models with significant nonlinearities there is an additional pitfall:

If the output is related to an input in a nonlinear fashion, the degree of sensitivity implied by a tornado chart may be misleading.

In general, we must be cautious about drawing conclusions about the sensitivity of a model outside the range of the parameters tested in a tornado chart.

Breakeven Analysis6 - 23

Analyzes where a particular point of interest occurs

Answers questions such as: How high does our market share need to be before we

turn a profit? How high would the discount rate have to be in order

for this project to have a NPV of zero?Excel Goal Seek is a useful tool.

Goal Seek6 - 24

Used for a single output and a single input

Output cell address

Target level sought

Input to vary

Optimization Analysis6 - 25

Finds set of decision variables that achieves best possible value of an output

Excel Solver is important tool.Answers questions such as:

How should we allocate our budget to maximize profit?

How much inventory should we stock of each type of product, given constraints on shelf size and budget?

Simulation: Risk Analysis6 - 26

Analyzes the effect of uncertainty on the output

Crystal Ball is an important tool.Answers questions such as:

What is the expected NPV after 25 years given that my return in each year is uncertain?

What is the probability that the NPV after 25 years is greater than $1,000,000, given that my return in each year is uncertain?

What is the distribution of NPV after 25 years given that my return in each year is uncertain?

Summary6 - 27

Base-case analysisWhat-if analysis

Scenario analysis Data Sensitivity tool Tornado charts

Breakeven analysis Goal Seek tool

Optimization analysisSimulation or risk analysis

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