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LAB05 SIMULATION MODELS

The document outlines a series of lab activities focused on financial modeling using Excel, including borrowing capacity analysis, NPV analysis, cost analysis, and scenario analysis. Each activity requires the creation of specific worksheets, application of financial functions, and the use of Excel features like Goal Seek, data tables, and sensitivity analysis. The goal is to develop skills in building financial models to assess personal and business financial scenarios.

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Chu Thuy Dung
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4 views

LAB05 SIMULATION MODELS

The document outlines a series of lab activities focused on financial modeling using Excel, including borrowing capacity analysis, NPV analysis, cost analysis, and scenario analysis. Each activity requires the creation of specific worksheets, application of financial functions, and the use of Excel features like Goal Seek, data tables, and sensitivity analysis. The goal is to develop skills in building financial models to assess personal and business financial scenarios.

Uploaded by

Chu Thuy Dung
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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BUSINESS MODELING LAB ROOM ACTIVITIES

LAB05 – SIMULATION MODELS

ACTIVITY 01 – BORROWING

Build an excel model to solve the following problem:

You want to pay off your mortgage in 10 years. The annual interest rate is 10.5%. The bank told you
that you can afford monthly payments of $3,000. How much can you borrow?

1. Create an excel workfile and name it “LAB05 SIMULATION MODEL”


2. Change the name of worksheet 1 to “Borrowing Capacity”
3. Build a model to solve the above problem and remember to separate the input and the
output section
4. You estimate that you need $300,000 to buy the house, please find the amount of monthly
payment you will have to pay?

Excel features & modeling

- Build a simple financial model for personal use (one time decision model)
- Using financial functions
- Using Goal seek feature

ACTIVITY 2 – NPV ANALYSIS

Your company is evaluating an investment project that requires an initial investment of $2,000,000.
The project lasts for 15 years and produces annual cash flow of $300,000. The current discount rate
used in assessing this project is 10%.

You decided to use NPV method to assess the profitability of this project. However, you are
concerned about the change in the discount rate and want to see the sensitivity of the project’s
profitability with regard to such change.

1. From your current workfile, create new


worksheet named “NPV ANALYSIS” that looks
like the model on the right.
2. Provide formula into cell D10 to find the
project NPV
3. Enter formula into cell D12 and perform DATA
table analysis. Is NPV sensitive to discount
rate?
4. Draw a line chart to present the relationship
between NPV and discount rate.

Excel features & model

- Data table
- Sensitivity analysis
- NPV
ACTIVITY 3 – COST ANALYSIS

1. Retrieve the file “Profitability Ratio Lab5” and copy it to your current lab file.
2. We have built a model to forecast several performance figures for the Lynx Corp. in 2010.
We collected balance sheet and income statements of the company for the two years 2008
and 2009. Using the “cost of sales approach”, we will project balance sheet and income
statement for the year ended 2010. This task has already performed. Lucky you!

We used several assumptions as listed above, and categorized them in to Uncontrollable


variables and Decision variables.

o Uncontrollable variables include growth rate and tax rate. Growth rate is dependent
on the market demand and corporate tax rate depends on the government’ policy.
Two of them are beyond the control of this firm. Hence, they are uncontrollable
variables.
o Controllable variables are decision variables because the firm can influence or
control such variables. In this case, we forecast BS and IS based on the percentage of
sales. So sales will be forecasted first and all other variables will be forecasted based
on Sales figures. For example: cost of sales = 71% x Sales.

3. Your first ask is to calculate some performance ratios of the company (row 90 to row 96)
4. This model is also used to analyze how changes in the assumption of Cost of sales & Sales
growth rates will affect the profitability of the firm. For example, if Cost of sales is 65% in
stead of 71% as it is now, so how profitability ratios change?

(1) Generate the two blue tables. What are the possible inference that you can get from
these two what-if analyses?

(2) In the table "Sensitivity...” construct formulas for cells C114, C116 and C118 and copy
them across. Instruction:

C114 =($E$35*C112)-($E$38+$E$39+$E$40+$E$41)-$E$46-$E$49

C116 =$E$35-($E$38*C112+$E$39+$E$40+$E$41)-$E$46-$E$49

C118 =$E$35-($E$38+$E$39*C112+$E$40+$E$41)-$E$46-$E$49

(3) From the "Sensitivity..." table, produce a Line Graph and conclude from the chart what
variable has the most effect on Net Income (it is the variable with the steepest line)

The results should look like these


Excel features & modelling

- Two-ways data table


- Sensitivity analysis
- Charting
- Using model to forecast

ACTIVITY 4 – SCENARIO ANALYSIS

1. Create a copy of worksheet “Profitability Ratio” and change its name to “Scenario
Analysis”
2. Perform scenario analysis for the following three scenario. Note that you want to find
Net Income of the company under the three scenarios (normal, optimistic, and
pessimistic cases)

Consider alternatives if assumptions no longer hold true:


o The current plan is consider as "Basic plan" as it is the most likely outcome.
o The pessimistic alternative is as follow:
 Growth rate: 3%
 Cost of sales: 75%
 Other expense: 3%
 Accounts receivable: 3%
o The optimistic alternative is as follow:
 Growth rate: 7%
 Cost of sales: 65%
 Other expense: -2%
 Accounts receivable: 0.5%

The result should look like this: (Use WHATIF/SCENARIO MANAGER)

3. Create a table to display how Net Income will change if Cost of Sales changes from 55%,
60%, 65%, 70%, 75%, and 80%. Properly format the new table.

Excel features & modeling

- Scenario manager
- Data table
- Formatting
- Analytical skills

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