Lecture 4
Analysis Using Spreadsheets
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Five Categories of
Spreadsheet Analysis
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Base-case analysis
What-if analysis
Breakeven analysis
Optimization analysis
Risk analysis
• A detailed analysis may include all of the above
steps.
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Base Case Analysis
• 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?
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What-if Analysis
• 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 analysis
• Also part of debugging process
– If output is unexpected we have uncovered either
a bug or an insight.
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Varying a Parameter
• Asking what if given information were
different
• Tests numerical assumptions of model
• e.g., how much will profit change if our
product costs turn out to be 10% higher or
lower than we have assumed?
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Varying a Decision Variable
• Exploring outcomes we can influence
• Leads us to better decisions
• e.g., how much will profit change if we spend
an extra $1000 on advertising in the first
quarter?
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Varying the Model Structure
• Tests key structural assumptions in model
• More complex than changes to parameters or
decision variables
• e.g., how does profit change if we change our
linear model of price and demand to a nonlinear one?
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Benchmarking
• 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
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The Paste Special Window
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Scenarios
• 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
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Scenario window
The Scenario Manager Window
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The Summary Produced by the Scenario Manager
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CHOOSE Function
• 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.
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Use of CHOOSE Function to Implement Scenarios
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Data Sensitivity
• Tabulates output based on varying inputs
• Found in Sensitivity Toolkit add-in
• Steps
– Select Sensitivity Toolkit – Data Sensitivity
– Choose table type One-Way or Two-Way
– Enter output to tabulate in result cell
– Click Next
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One-Way Tables
• Cell to Vary is (single) input to vary
• Input 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
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The One-Way Inputs For Data
Sensitivity
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Two-Way Tables
• Allows two inputs to be varied
• Will output a two-dimensional table that
displays the output based on the varying
values of the two input variables
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Tornado Charts
• Measures the sensitivity of parameters
defined in the model
– Determines how the output changes based
on changes in the inputs
• Shows which parameters have a major
impact on the results and which do not
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Types of Tornado Chart
• Constant Percentage
– Will vary all parameters by a constant percentage entered
by the user
• Variable Percentage
– Percentages can be different for all parameters.
– Should be entered in a column beside original parameters
• 10/90 Percentiles
– Discussed in Chapter 9
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Tornado Chart Window
Cell value to evaluate
Cell inputs to vary
(should be numbers)
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Limitations of Tornado Charts
 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.
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Breakeven Analysis
• 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.
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Goal Seek
• Used for a single output and a single input
Output cell address
Target level sought
Input to vary
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Optimization Analysis
• 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?
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Simulation: Risk Analysis
• 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?
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Summary
• Base-case analysis
• What-if analysis
– Scenario analysis
– Data Sensitivity tool
– Tornado charts
• Breakeven analysis
– Goal Seek tool
• Optimization analysis
• Simulation or risk analysis
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Demo
• Excel Model
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