PART
4. Interpret the results
7.3 ALTERNATIVE WAYS TO CREATE SCENARIOS IN EXCEL
Next we need to set up a combo box (drop-down list) into the active worksheet where the model of Exhibit 7.1 is located. As we have already described in Chapter 4 we first need to activate the Developer tab (Office button/Excel Options/Popular/check Show Developer tab in the ribbon). Then we click on the Developer tab and then select the Insert button in the Controls Section. From a number of Form Controls we pick the Combo Box (Exhibit 7.9).
By now the cursor should have been changed to a small crosshair. To create the combo box we click and drag the mouse button to an empty space on the worksheet (Exhibit 7.10a).
Once we obtain the desired size we release the mouse button and the combo box just appears in our worksheet. The next step is to link it with the list of possible scenarios (the base case, the worst case, and the best case). To do this we first need to create the list. This list can be located on the same or a different worksheet. Let us create it on the same worksheet from cells A18:A20 (Figure 7.10b) to make it easier to follow. Then we right click on the combo box and select the last option, Format Control medium. The window of Exhibit 7.10c appears. In the Input Range box we simply input the cell range defined earlier (A18:A20) that contains the values that we wish to see in the combo box. Subsequently we select the Cell link, i.e. the cell that is linked to the combo box. This cell will display the combo box selection. We type C2.
Finally we tick the 3-D shading box to add some aesthetics to our combo box and click OK.
As we see in Exhibit 7.10d when we click on the down arrow of the combo box, we see the list of scenarios shown in range A18:A20. When we select an item in the list, Excel returns EXHIBIT 7.8 OFFSET function returns to cell A2 the value of 11 (4 rows below and 2 columns to the right of the reference cell C2)
EXHIBIT 7.9 Inserting a combo box in the model worksheet
EXHIBIT 7.10 Setting up a combo box (drop-down list) in our worksheet (a)
(b)
(c)
(d)
the number to the linked cell C2, which corresponds to the selected item. For example when we select the worst case scenario, Excel returns 1 in cell C2, when we select the base case Excel returns 2, and when we select the best case Excel returns 3 in cell C2 respectively.
Having finished with the set-up of the combo box (drop-down list), it is time to link its output to the input variables of the model. Let us first create a table with the 3 different scenario values as shown in Exhibit 7.11a. Then let us use Excel’s OFFSET function, as described above, to link the table values with the input variables of the model. Exhibit 7.11b shows the syntax of the OFFSET function for each one of the input variables of the model.
The growth rate input variable will take the value of the cell located 1 row below and C2 columns to the right of the reference cell which is K1 or =OFFSET($K$1;1;$C$2) (Exhibit 7.11b). If the worst case scenario is chosen in the combo box then C2 takes the value of 1 and the growth rate input variable will take the value of the one located 1 row below and 1 column to the right of cell K1 or 3%. If we had chosen the base case scenario then the output cell of the combo box would have taken the value of 2 and the growth rate input variable would be
equal to the value of the cell located 1 row below and 2 columns to the right of cell K1 or 5%.
Similarly, if we had chosen the best case scenario then the output cell of the combo box would have taken the value of 3 and the growth rate input variable would be equal to the value of the cell located 1 row below and 3 columns to the right of cell K1 or 8%. The same applies for the discount rate and the inflation rate. For example, by choosing the best case scenario the linked cell takes the value 3. Then the discount rate input variable will take the value of the cell located 2 rows below and 3 columns to the right of the reference cell K1 or 7%. Subsequently the inflation rate will take the value of the cell located 3 rows below and 3 columns to the right of the reference cell K1 or 1.6% (Exhibit 7.11c). We see that cell B6, which is the output cell of the model, takes the value of €928. This value is obviously the same as the one presented in the “Scenario Summary” worksheet of Exhibit 7.7 under the best case scenario.
Once you build the scenario analysis capabilities into the model in the way we have pre-sented in this section, you may find it more functional to present various scenarios through a drop-down list. The methodology presented above can be applied to complex models with many alternative scenarios. What you have to do is to build:
(a) a list with the names of all possible scenarios somewhere remotely from your model’s area, and
(b) the table with the input variable values of all possible scenarios.
The rest are handled by the OFFSET function in the way we have demonstrated above.
Nevertheless, the OFFSET function has drawbacks and is often used in an unsatisfactory man-ner. Some modellers avoid it because it makes models less transparent by being harder to review, is difficult to explain, and reduces user confidence in the model since it is not easily understood.
EXHIBIT 7.11 Steps a to c present the use of the OFFSET function to link the inputs of a model to possible scenarios presented in a table
(a)
(b)
(c)
Referencell
For example OFFSET() can bring up silly answers and present them as valid if you do not notice that it excludes the reference cell when calculating the “rows” and “columns” components, but includes the reference cell when calculating the “height” and “width” components. This can be confusing, and requires extreme care. Of course, there are other techniques, less popular than the one with the use of the OFFSET functions described above, which can be used to incorporate scenario analysis into a model. A combination of Excel’s INDEX and MATCH functions is one of them. We do not intend to describe every single technique in this section but if you are still interested you can visit the Wall Street Prep site and read the article “Financial Modelling Tech-niques: Index & Match”4 in case you are looking for an alternative to the OFFSET function.