Modeling Demand , price and net present value

1 The 19th Hole trendlines exp

2 Gopher Drugs future cash flows net present value (NPV)
3 Assignments trendlines exp
4 Midcourse Project sumproduct ROI
abs avrage

abs avrage future cashnet present value (NPV)

Symbol Operation
+ (plus sign) Addition
- (minus sign) Subtraction
* (asterisk) Multiplication
/ (forward slash) Division
% (percent sign) Percent (divide by 100)
^ (caret) Exponentiation

Function Type General Form

Exponential 𝑦=𝑎𝑒𝑏𝑥y=aebx
Linear 𝑦=𝑚𝑥+𝑏y=mx+b
Logarithmic 𝑦=𝑎ln⁡(𝑥)+𝑏y=aln(x)+b
Power 𝑦=𝑎𝑥𝑏y=axb
Polynomial 𝑦=𝑎0+𝑎1𝑥+𝑎2𝑥2⋯+𝑎𝑛𝑥𝑛y=a0+a1x+a2x2⋯+anxn (for some number 𝑛n)
​ ​ ​ ​

EXP() returns e raised to a number.

LN() returns the natural logarithm of a number.
ABS() returns the absolute value of a number.
AVERAGE() takes a range or list of numbers as an input and returns the average (arithmetic mean) of those numbers.
 Constants When to Use It
𝑎a and 𝑏b Values increase slowly at first then more quickly; or values decrease quickly at first then more s
𝑚m (slope) and 𝑏b (intercept) Values increase or decrease at a steady rate.
𝑎a and 𝑏b Values increase quickly at first then level out.
𝑎a (coefficient) and 𝑏b (exponent) Values increase slowly at first then more quickly.
𝑎0,𝑎1,…,𝑎𝑛a0,a1,…,an
​ ​ ​ Values are not strictly increasing or decreasing, but go up and down instead.

) of those numbers.
ease quickly at first then more slowly.

own instead.
 The 19th Hole
Month Price Demand (00s)
1 450 45
2 300 103
3 440 49
4 360 86
5 290 125
6 450 52
7 340 87
8 370 68
9 500 45
10 490 44
11 430 58
12 390 68

Linear model Y=mx+b

Intercept (b) 211.31
Slope (m) -0.3546

Power Model Y=ax^b

Contant (a) 5871064
exponent (b) -1.908

Eponential Model y=ae^(bx)

Contant (a) 466.51
exponent (b) -0.005

Prediction based on models

Price(x) Linear model Y=mx+b Power Model

Intercept (b) 211.31 Contant (a)
Slope (m) -0.3546 exponent (b)
450 51.7
300 104.9
440 55.3
360 83.7
290 108.5
450 51.7
340 90.7
370 80.1
500 34.0
490 37.6
430 58.8
 390 73.0

Model the business

Unit cost $ 300.00 per set

Sales price $ 300 Mutiple of 10
Demand in (00) 110 =E34*B53^E35 Power model
Actual demand 11025 =B54*100 y=ae^(bx)

Cost $ 3,307,430 =B55*B52

Revnue $ 3,307,430 =B55*B53
Profit $ - =B58-B57

One way Table

$12

$10

$8

$6

$4

$2

$-
200 300 400 500 600 700 800

Go to the Chart Design tab and click Add Chart Element. Or, click the plus sign (+) at the top right corner of the
chart.

Click Trendline.

Select More Trendline Options from the bottom of the drop-down menu that appears.

Examine and select one of the trendline options: exponential, linear, logarithmic, polynomial, or power. You can
refer to the table below, or use the small pictures next to each option as a guide for the type of trendline that will
best fit the shape of your data. When you select a trendline, it will appear on the chart.

Check the box next to Display Equation on chart. The equation will then appear on the chart.

If the equation is in the middle of the chart, it is usually hard to read, so you can click and drag it to a clear area on
the chart.
best fit the shape of your data. When you select a trendline, it will appear on the chart.

Check the box next to Display Equation on chart. The equation will then appear on the chart.

If the equation is in the middle of the chart, it is usually hard to read, so you can click and drag it to a clear area on
the chart.

Year year No Revenue (millions of USD)

2017 1 $218.6
2018 2 $435.0
2019 3 $915.0 Rev
2020 4 $1,825.9 $4,500.0
2021 5 $4,021.8 f(x) = 135.80
$4,000.0
2022 6 $3,582.1
$3,500.0
$3,000.0
$2,500.0
$2,000.0
$1,500.0
$1,000.0
$500.0
$0.0
0 1 2

Power Model Y=ax^b

Contant (a) 173.9
year No Revenue (millions of USD) exponent (b) 1.7209
1 $218.6 173.90
2 $435.0 573.25
3 $915.0 1151.80
4 $1,825.9 1889.66
5 $4,021.8 2774.32
6 $3,582.1 3796.82
 year No Revnue
Year
2017 1 249.90559214576
2018 2 459.88810740592
2019 3 846.30787777666
2020 4 1557.4158419249
2021 5 2866.030399068
2022 6 5274.2048894465
2023 7 9705.8416494492
2024 8 17861.149518988
2025 9 32868.933335396
2026 10 60486.967955682
2027 11 111310.98338782
In this lesson, we will use trendlines in Excel to model the relationship between the demand for a product and its price. Read
the problem below carefully. If you’d like, take notes and start setting up a spreadsheet model of your own. Then, watch the
next video in the course to see a solution.
The company wants to estimate the relationship between demand and price and then use this estimated relationship to
answer the following questions:
Scenario
The 19th Hole sells golf clubs at its golf outlet stores throughout the US. The company knows that the demand for its club
varies considerably with price. In the last year, the demand at each price level was recorded in the table below.

Assuming the unit cost of producing a set of clubs is $250, and the price must be a multiple of $10, what price should the
company charge to maximize its profit?

How does the optimal price depend on the unit cost of producing a set of clubs?

Is the model an accurate representation of reality?

Demand vs price
140

120

100 f(x) = 466.510119229519 exp( − 0.00491060734945113 x )

80
Demand

60

40

20

0
250 300 350 400 450 500 550
Price

Y=ax^b Eponential Model y=ae^(bx) Absolute percernt error

5871064 Contant (a) 466.51
-1.908 exponent (b) -0.005 Demand Linear model Power Model
50.9 49.2 45 14.98% 13.03%
110.2 104.1 103 1.87% 7.04%
53.1 51.7 49 12.83% 8.35%
77.9 77.1 86 2.73% 9.47%
117.6 109.4 125 13.22% 5.91%
50.9 49.2 52 0.50% 2.19%
86.8 85.2 87 4.31% 0.20%
73.9 73.4 68 17.81% 8.66%
41.6 38.3 45 24.42% 7.56%
43.2 40.3 44 14.65% 1.74%
55.5 54.3 58 1.43% 4.36%
 66.8 66.4 68 7.38% 1.72%
Average 9.68% 5.85%

Power model
One way Data table Two way table

price profit price Cost

$ - $ - 250
$ 250 $ 250
$ 260 $ 260
$ 270 $ 270
$ 280 $ 280
$ 290 $ 290
$ 300 $ 300
$ 310 $ 310
$ 320 $ 320
$ 330 $ 330
$ 340 $ 340
$ 350 $ 350
$ 360 $ 360
$ 370 $ 370
$ 380 $ 380
$ 390 $ 390
$ 400 $ 400
$ 410 $ 410
$ 420 $ 420
$ 430 $ 430
$ 440 $ 440
$ 450 $ 450
$ 460 $ 460
$ 470 $ 470
$ 480 $ 480
$ 490 $ 490
$ 500 $ 500
0 800
$ 510 $ 510
$ 520 $ 520
$ 530 $ 530
the top right corner of the $ 540 $ 540
$ 550 $ 550
$ 560 $ 560
$ 570 $ 570
rs. $ 580 $ 580
$ 590 $ 590
olynomial, or power. You can
the type of trendline that will $ 600 $ 600
art. $ 610 $ 610
$ 620 $ 620
he chart.
$ 630 $ 630
k and drag it to a clear area on $ 640 $ 640
art.

he chart.

k and drag it to a clear area on

$ 650 $ 650
$ 660 $ 660
$ 670 $ 670
$ 680 $ 680
$ 690 $ 690
$ 700 $ 700
$ 710 $ 710
$ 720 $ 720
$ 730 $ 730
$ 740 $ 740
$ 750 $ 750

Revenue (millions of USD)

$4,500.0
f(x) = 135.801286677229 exp( 0.609875008104077 x )
$4,000.0
$3,500.0
$3,000.0
$2,500.0
$2,000.0
$1,500.0
$1,000.0
$500.0
$0.0
0 1 2 3 4 5 6 7

Eponential Model y=ae^(bx) Absolute percernt error

Contant (a) 135.8
exponent (b) 0.610 Power Model Exponential Model
249.90559214576 20.45% 14.32%
459.88810740592 31.78% 5.72%
846.30787777666 25.88% 7.51%
1557.4158419249 3.49% 14.70%
2866.030399068 31.02% 28.74%
5274.2048894465 5.99% 47.24%
Avrage 19.77% 19.70%
a product and its price. Read
f your own. Then, watch the

stimated relationship to

at the demand for its club

the table below.

10, what price should the

500 550

ute percernt error

Eponential Model
9.27%
1.06%
5.49%
10.33%
12.46%
5.44%
2.04%
7.87%
14.90%
8.51%
6.31%
 2.39%
7.17%

Exponential Model
One way Data table Two way table

Cost price profit price Cost

300 $ - $ - 250 300
$ 250 $ 250
$ 260 $ 260
$ 270 $ 270
$ 280 $ 280
$ 290 $ 290
$ 300 $ 300
$ 310 $ 310
$ 320 $ 320
$ 330 $ 330
$ 340 $ 340
$ 350 $ 350
$ 360 $ 360
$ 370 $ 370
$ 380 $ 380
$ 390 $ 390
$ 400 $ 400
$ 410 $ 410
$ 420 $ 420
$ 430 $ 430
$ 440 $ 440
$ 450 $ 450
$ 460 $ 460
$ 470 $ 470
$ 480 $ 480
$ 490 $ 490
$ 500 $ 500
$ 510 $ 510
$ 520 $ 520
$ 530 $ 530
$ 540 $ 540
$ 550 $ 550
$ 560 $ 560
$ 570 $ 570
$ 580 $ 580
$ 590 $ 590
$ 600 $ 600
$ 610 $ 610
$ 620 $ 620
$ 630 $ 630
$ 640 $ 640
$ 650 $ 650
$ 660 $ 660
$ 670 $ 670
$ 680 $ 680
$ 690 $ 690
$ 700 $ 700
$ 710 $ 710
$ 720 $ 720
$ 730 $ 730
$ 740 $ 740
$ 750 $ 750
Gopher Drugs
In this lesson, we will use Excel to model future cash flows and make decisions based on net present value (NPV). Read the pro
the next video in the course to see a solution.

Scenario
A large drug company, Gopher Drugs, is deciding whether one of its new drugs, Iguazu, is worth pursuing. Iguazu is in the fina
to be incurred at the beginning of year 1, is $9.3M. The company estimates that the demand for Iguazu will gradually grow an
minus cost) to be $1.2M in year 1, then to increase at an annual rate of 10% through year 8, and finally to decrease at an annu
assuming its cash flows, other than the initial development cost, are incurred at the end of the respective years. Using an ann
the following questions:

Is the drug worth pursuing, or should Gopher Drugs abandon it now and not incur the $9.3M development cost?

How do changes in the model change the answer to the prior question?

Cost Cashflow
Final cost 9.3 Year 1 End of yearGross margin
life time 20 Years 1 $ 1.20
gross margins 1.2 Year 1 2 $ 1.32
Increse Year 8 3 $ 1.45
Increse rate 10% Year 8 4 $ 1.60
Decrese rate 5% Year 20 5 $ 1.76
discount rate 12% 6 $ 1.93
7 $ 2.13
(N)PV ₹ 11.85 =NPV(B9,F4:F23) 8 $ 2.02
Final cost 9.3 Year 1 9 $ 1.92
NPV ₹ 2.55 =B11-B12 10 $ 1.82
11 $ 1.73
12 $ 1.64
13 $ 1.56
14 $ 1.48
15 $ 1.41
16 $ 1.34
17 $ 1.27
18 $ 1.21
19 $ 1.15
20 $ 1.09

Year Cash Inflow (end of year)

1 $30,000
2 $65,000
3 $80,000
4 $75,000
 5 $55,000

Initital cost $ 150,000.00

Discount rate 15%

(N)PV $ -
ed on net present value (NPV). Read the problem below carefully. If you’d like, take notes and start setting up a spreadsheet model of you

azu, is worth pursuing. Iguazu is in the final stages of development and will be ready to enter the market one year from now. The final co
e demand for Iguazu will gradually grow and then decline over its useful lifetime of 20 years. Specifically the company expects its gross m
gh year 8, and finally to decrease at an annual rate of 5% through year 20. Gopher Drugs wants to develop a spreadsheet model of its 20-y
e end of the respective years. Using an annual discount rate of 12% for purposes of calculating net present value (NPV), the drug company

he $9.3M development cost?

Cashflow
ross margin
=B5
=IF(E5<$B$6, F4*(1+$B$7),F4*(1-$B$8)) The XNPV Function
=IF(E6<$B$6, F5*(1+$B$7),F5*(1-$B$8)) There is another Excel function, XNPV, which can compu
cash flows occur at irregular times. Like the NPV functio
=IF(E7<$B$6, F6*(1+$B$7),F6*(1-$B$8)) discount rate and the values of the cash flows. Then, th
=IF(E8<$B$6, F7*(1+$B$7),F7*(1-$B$8)) also used as inputs. For more information on how to us
=IF(E9<$B$6, F8*(1+$B$7),F8*(1-$B$8)) XNPV function
(Microsoft Support).
=IF(E10<$B$6, F9*(1+$B$7),F9*(1-$B$8))
=IF(E11<$B$6, F10*(1+$B$7),F10*(1-$B$8))
=IF(E12<$B$6, F11*(1+$B$7),F11*(1-$B$8))
=IF(E13<$B$6, F12*(1+$B$7),F12*(1-$B$8))
=IF(E14<$B$6, F13*(1+$B$7),F13*(1-$B$8))
=IF(E15<$B$6, F14*(1+$B$7),F14*(1-$B$8))
=IF(E16<$B$6, F15*(1+$B$7),F15*(1-$B$8))
=IF(E17<$B$6, F16*(1+$B$7),F16*(1-$B$8))
=IF(E18<$B$6, F17*(1+$B$7),F17*(1-$B$8))
=IF(E19<$B$6, F18*(1+$B$7),F18*(1-$B$8))
=IF(E20<$B$6, F19*(1+$B$7),F19*(1-$B$8))
=IF(E21<$B$6, F20*(1+$B$7),F20*(1-$B$8))
=IF(E22<$B$6, F21*(1+$B$7),F21*(1-$B$8))
=IF(E23<$B$6, F22*(1+$B$7),F22*(1-$B$8))
 readsheet model of your own. Then, watch

r from now. The final cost of development,

pany expects its gross margins (revenue
dsheet model of its 20-year cash flows,
NPV), the drug company wants to answer

, XNPV, which can compute net present value when

mes. Like the NPV function, the first inputs are the
the cash flows. Then, the dates of the cash flows are
nformation on how to use this function, see
 Part 1: Microsoft
Year Year No Average of Seasonally Adjusted Sales
1992 Year 1 $ 150,781.17
1993 Year 2 $ 161,696.25
1994 Year 3 $ 175,688.83
1995 Year 4 $ 185,437.25
1996 Year 5 $ 196,728.17
1997 Year 6 $ 206,334.08
1998 Year 7 $ 215,657.67
1999 Year 8 $ 233,872.00
2000 Year 9 $ 248,748.25
2001 Year 10 $ 255,663.75
2002 Year 11 $ 261,272.42
2003 Year 12 $ 272,232.50
2004 Year 13 $ 288,987.50
2005 Year 14 $ 307,826.08
2006 Year 15 $ 323,823.08
2007 Year 16 $ 334,008.00
2008 Year 17 $ 328,780.33
2009 Year 18 $ 303,288.92
2010 Year 19 $ 323,964.17
2011 Year 20 $ 349,717.75

Exponential model
a
Year No Average of Seasonally Adjusted Sales b
1 $ 150,781.17
2 $ 161,696.25
3 $ 175,688.83
4 $ 185,437.25
5 $ 196,728.17
6 $ 206,334.08
7 $ 215,657.67
8 $ 233,872.00
9 $ 248,748.25
10 $ 255,663.75
11 $ 261,272.42
12 $ 272,232.50
13 $ 288,987.50
14 $ 307,826.08
15 $ 323,823.08
16 $ 334,008.00
17 $ 328,780.33
18 $ 303,288.92
19 $ 323,964.17
20 $ 349,717.75

Part 2: Toy Company

Cost $ 4,000,000.00

Exp slaes 80000

unit price $ 25.00
Growth rate g 49%
Variabke cost 0
fixed SG&A 40%
fixed SG&A rate 2%

Revenue 0

Profit $ 4,000,000.00

Discount rate 5%

(N)PV ₹ 3,303,159.13
NPV ₹ -696,840.87
Percentage growth
0.0%
7.2%
8.7%
5.5% Average of Seasonally Adjusted Sales
6.1% $400,000.00
4.9%
$350,000.00
4.5% f(x) = − 210.200083542189 x² + 14850.3731829574 x + 130460.201900585
8.4% $300,000.00
6.4% $250,000.00
2.8%
$200,000.00
2.2%
4.2% $150,000.00
6.2%
$100,000.00
6.5%
5.2% $50,000.00
3.1% $-
-1.6% 0 5 10 15 20

-7.8%
6.8%
7.9%
4.6%

Y=ae^(bx)
158193
0.043 ABS
$ 165,143.67 9.5%
$ 172,399.73 6.6%
$ 179,974.61 2.4%
$ 187,882.32 1.3%
$ 196,137.47 0.3%
$ 204,755.34 0.8%
$ 213,751.86 0.9%
$ 223,143.67 4.6%
$ 232,948.13 6.4%
$ 243,183.38 4.9%
$ 253,868.35 2.8%
$ 265,022.79 2.6%
$ 276,667.33 4.3%
$ 288,823.51 6.2%
$ 301,513.81 6.9%
$ 314,761.69 5.8%
$ 328,591.65 0.1%
$ 343,029.28 13.1%
$ 358,101.26 10.5%
$ 373,835.48 6.9%
$ 1,999,826.70 4.8%

fixed SG&A rate Year revenue costs profit

ml 40% 1 $ 2,000,000.00 $ 1,800,000.00 $ 200,000.00
38% 2 $ 2,976,945.55 $ 2,619,712.08 $ 357,233.47
36% 3 $ 4,431,102.39 $ 3,810,748.06 $ 620,354.33
34% 4 $ 6,595,575.27 $ 5,540,283.22 $ 1,055,292.04
utill 5 years 32% 5 $ 9,817,334.21 $ 8,050,214.05 $ 1,767,120.16
$ 4,000,000.00
break even $ 0.00
Year 1
Year 1 onwards
djusted Sales

574 x + 130460.201900585

15 20 25
 Financial Estimates for Potential Projects (in $millions)
Project Index Functional Area (FA) Partnership Percentage Capex Year 1 Capex Year 2
1 FA1 100% $ 250.00 $ 100.00
2 FA1 33% $ 500.00 $ 300.00
3 FA1 50% $ 100.00 $ 200.00
4 FA1 100% $ 750.00 $ 500.00
5 FA1 75% $ 200.00 $ 400.00
6 FA2 50% $ 1,000.00 $ 300.00
7 FA2 100% $ 750.00 $ 750.00
8 FA2 100% $ 800.00 $ 700.00
9 FA2 67% $ 400.00 $ 600.00
10 FA3 100% $ 100.00 $ 200.00
11 FA3 50% $ 700.00 $ 500.00
12 FA3 100% $ 1,500.00 $ 400.00

Project Index Functional Area (FA) Partnership Percentage Capex Year 1 Capex Year 2
1 FA1 100% $ 250.00 $ 100.00
2 FA1 33% $ 165.00 $ 99.00
3 FA1 50% $ 50.00 $ 100.00
4 FA1 100% $ 750.00 $ 500.00
5 FA1 75% $ 150.00 $ 300.00
Yearly Cost $ 1,115.00 $ 999.00

Project Index Functional Area (FA) Partnership Percentage Capex Year 1 Capex Year 2
6 FA2 50% $ 500.00 $ 150.00
7 FA2 100% $ 750.00 $ 750.00
8 FA2 100% $ 800.00 $ 700.00
9 FA2 67% $ 268.00 $ 402.00
Yearly Cost $ 1,518.00 $ 1,302.00

Project Index Functional Area (FA) Partnership Percentage Capex Year 1 Capex Year 2
10 FA3 100% $ 100.00 $ 200.00
11 FA3 50% $ 350.00 $ 250.00
12 FA3 100% $ 1,500.00 $ 400.00
Yearly Cost $ 1,850.00 $ 650.00

Cap Ex. Yr1 Cap Ex. Yr2

Overall Totals for Approved Projects: $ 4,483 $ 2,951

ROI
% Change Average
 15%
0%
5%
10%
15%
20%
25%
30%
s)
Capex Year 3 NPV
$ 100.00 60 Annual revenue $ 50,000.00 M
$ 300.00 180 Total exp $ 10,000.00 M
$ 400.00 80 Yearly cap $ 4,000.00 M
$ 300.00 310 Discount rate 12%
$ 800.00 220
$ 300.00 180
$ 300.00 410
$ 600.00 280
$ 800.00 380
$ 400.00 100
$ 300.00 260
$ 400.00 340

Capex Year 3 NPV Total capex New NPV ROI Approval Rating
$ 100.00 60 $ 450.00 53 0
$ 99.00 180 $ 363.00 158 14% 1
$ 200.00 80 $ 350.00 70 10% 1
$ 300.00 310 $ 1,550.00 273 18% 1
$ 600.00 220 $ 1,050.00 194 14% 1
$ 1,199.00 $ 3,313.00

Capex Year 3 NPV Total capex New NPV ROI Approval Rating
$ 150.00 180 $ 800.00 158 10% 1
$ 300.00 410 $ 1,800.00 361 20% 1
$ 600.00 280 $ 2,100.00 246 0
$ 536.00 380 $ 1,206.00 334 19% 1
$ 986.00 $ 3,806.00

Capex Year 3 NPV Total capex New NPV ROI Approval Rating
$ 400.00 100 $ 700.00 88 0
$ 150.00 260 $ 750.00 229 15% 1
$ 400.00 340 $ 2,300.00 299 13% 1
$ 550.00 $ 3,050.00

Cap Ex. Yr3 Total Cost Total Approved NPV:

$ 2,735 $ 10,169 $ 2,077

ROI
Minimum Maximum
10% 20%