Perspective Analytics

Why Spreadsheets?

 Many commercial software packages can

be used for Business Analytics.
 Spreadsheet software, such as Microsoft
Excel, is widely available and used
across all areas of business.
 R and Python are other software which
you can use.
 Basic Excel Skills Examples
 Opening, saving, and printing files
 Using workbooks and worksheets
 Moving around a spreadsheet
 Selecting cells and ranges
 Inserting/deleting rows and columns
 Entering and editing text, data, and formulas
 Formatting data (number, currency, decimal)
 Working with text strings
 Formatting data and text
 Modifying the appearance of a spreadsheet
Excel 2013 Ribbon
 Tabs - Home, Insert, Page Layout, Formulas, …
 Groups - Font, Alignment, Number, Styles, …
 Buttons and Menus
- Buttons appear as small icons.
- Menus of additional choices are indicated by
small triangles.
Excel Formulas
 Common mathematical operators are used.
 For example:

a − bP5 + would be entered into Excel as:

=a− b*P^5 + c/d

Relative and Absolute References
 Cell references can be relative or absolute. Using a dollar sign
before a row and/or column label creates an absolute reference.
 Relative references: A2, C5, D10
 Absolute references: $A$2, $C5, D$10
 Using a $ sign before a row label (for example, B$4) keeps the
reference fixed to row 4 but allows the column reference to
change if the formula is copied to another cell.
 Using a $ sign before a column label (for example, $B4) keeps the
reference to column B fixed but allows the row reference to
change.
 Using a $ sign before both the row and column labels (for
example, $B$4) keeps the reference to cell B4 fixed no matter
where the formula is copied.
Example 2.1 Implementing Price-
Demand Models in Excel
Two models for predicting demand as a function of price
Linear
D = a – bP
Formula in cell B8:
=$B$4-$B$5*$A8

Nonlinear
D = cP-d
Formula in cell E8:
=$E$4*D8^-$E$5

Note how the absolute addresses are used so that as these formulas
are copied down, the demand is computed correctly.
Copying Formulas

Formulas in cells can be copied in many

ways.
 Use the Copy button in the Home tab,
then use the Paste button
 Use Ctrl-C, then Ctrl-V
 Drag the bottom right corner of a cell (the
fill handle) across a row or column
Other Useful Excel Tips

 Split Screen
 Paste Special
 Column and Row Widths
 Displaying Formulas in Worksheets
 Displaying Grid Lines and Column Headers for Printing
 Filling a Range with a Series of Numbers
 Basic Excel Functions
 =MIN(range)
 =MAX(range)
 =SUM(range)
 =AVERAGE(range)
 =COUNT(range)
 =COUNTIF(range,criteria)
Example 2.2 Using Basic Excel
Functions

=MIN(F4:F97)
=MAX(F4:F97)
=SUM(G4:G97)
=AVERAGE(H4:H97)
=COUNT(B4:B97)
=COUNTIF(D4:D97,”=O-Ring”)
=COUNTIF(H4:H97,”<30”)
=COUNTIFS(D4:D97,"O-Ring",A4:A97,"Spacetime Technologies")
 Other IF-Type Functions
 SUMIF, AVERAGEIF, SUMIFS, and AVERAGEIFS can
be used to embed IF logic within mathematical
functions.
 For instance, the syntax of SUMIF is
 SUMIF(range, criterion, [sum range]). "Sum range" is
an optional argument that allows you to add cells in
a different range.
 Example: In the Purchase Orders database, to
find the total cost of all airframe fasteners, use
=SUMIF(D4:D97,"Airframe fasteners", G4:G97)
Functions for Specific
Applications
 Net Present Value (or discounted cash flow) measures the worth of a
stream of cash flows, taking into account the time value of money.
 Excel function: =NPV(rate,value1,value2,…)
 F is the cash flow ($)
 Rate (i) is the discount rate
 value1, value2,…are equally-spaced payments or income values
 t is a time period
Think-Pair & Share

 Think: Take a moment to consider your own

experiences and knowledge of Microsoft Excel. Reflect
on the following questions:
 How often do you use Excel in your personal or
professional life?
 What are some of the most common tasks you perform
in Excel?
 What features or functions of Excel do you find most
useful or challenging?

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 1-14

Continue..
 Pair: Now, pair up with a partner, whether it's a
colleague, friend, or someone nearby. Discuss your
thoughts and experiences with Microsoft Excel.
Share your answers to the questions above and
listen to your partner's perspective. Consider the
following prompts to guide your discussion:
 How does your partner use Excel in their personal
or professional life?
 Are there any Excel features or functions your
partner finds particularly helpful or difficult?
 Share any tips or tricks you've discovered for using
Excel more effectively.

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 1-15

Continue..
 Share: Finally, come together as a group and share
some of the insights and observations from your
discussions. Encourage each person to contribute their
thoughts and experiences with Excel. Consider the
following discussion points:
 What are some common themes or patterns that
emerged from your discussions?
 Did you learn any new tips or tricks for using Excel more
efficiently?
 How do your experiences with Excel compare to those
of others in the group?
 Are there any areas where you or your group members
would like to improve your Excel skills?

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 1-16

Example 2.3 Using the NPV Function

Cell B8:
=NPV(B6, C4:H4) – B5
Cash Flows
1. Discounted Cash Flow

2. Non Discounted Cash Flow

18
Discounted cash flow
1. Discounted Cash flow is nothing but the Opportunity Cost.

2. Rate of return that an organization could have earned on the investment, if not invested in
the current project.

3. In other words, it’s the rate of return that an organization is willing to loose in an expectation
to earn more by investing in this project.

4. It is the lost opportunity on the capital that is being invested in the projects.

5. Other names for Discounted cash flow

▪ Opportunity Cost of Capital

▪ Cost of Capital
19
Discounted cash flow
Let’s say If an organization earns 10% interest per annum on its capital by putting the money in
bank instead of investing in the project.

What is the opportunity cost of the capital ?

10% - You are correct.

Since it is the minimum that an organization could have earned if invested the money in the bank.

20
Non Discounted cash flow
• In Non discounted cash flow, the interest rate, opportunity cost or Discounted cash flow is
not taken in to consideration.

21
Consideration for Capital budgeting

counted
DisDiscounted • NPV - Net present Value
• IRR - Internal Rate of Return
h flowFlow
CasCash • PI – Profitability Index

Non-Discounted
counted
• Payback period (Payback period is usually calculated
Non-Dis
Cash flow considering the Non discounted cash flow.
Cash flow

22
 Time Value of Money
A Dollar sitting in your wallet is worth more today than the same dollar tomorrow.

Can you tell Why?

• Depreciation.

• Money grows over time when it earns interest.

So, the time value of money brings us to the concept of

• Future Value of Money.

• Present Value of Money.

23
Relationship between FV & PV
• Future Value of Money (let’s call it FV)

• Present Value of Money (let’s call it PV)

FV = PV (1 + K)n
FV = Future Value
PV = Present Value
K = Discounted Rate in %
n = Number of Years

24
Relationship between FV & PV

25
Calculate the Future Value
Example: If $ 100 dollars is invested in a bank today may earn 8% per year.
what is the future value of the $ 100 dollars for 1st, 5th and 15th year?

FV = PV (1 + k)n PV = 100
n=1
n=5
n = 15
K = 8%
FV = ? When n =1, n=5, n=15

After 1 year(n=1): FV = 100 X (1.08)1 = 100*1.08 = $108

After 5 years (n=5): FV = 100 X (1.08) 5 = 100*1.08*1.08*1.08*1.08*1.08 = $146.93
After 15 years (n=15): FV = 100 X (1.08) 15 = $317.22

26
Calculate the Present Value
Example
If $ 100 dollars is to be received after 1 year, what is the present value of $100 dollars today?
If $ 100 dollars is to be received after 5 years, what is the present value of $100 dollars today?
If $ 100 dollars is to be received after 15 years, what is the present value of $100 dollars today?
Note: Discounted rate is 8% per year .
FV = 100
n=1
n=5
n = 15
K = 8%
PV = ? for n =1, n=5, n=15

The Present value of $ 100 to be received after 1 year is $93 dollars today.
The Present value of $ 100 to be received after 5 years is $68 dollars today.
The Present value of $ 100 to be received after 15 year is $32 dollars today.

27
 A quick recap so far…
So far we learned about

• Dicounted Cash flow (Opportunity cost)

• Non Discounted Cash flow
• Future Value
• Present Value

28
Net Present Value
Capital Budgeting

Net Present Value

turn
Internal Rate of Re

Profitability Index

Payback Period

29
Net Present Value

Net Present Value (NPV) = “Present Value of all cash inflows – Present Value of all
cash outflow”

Example: Salary Slip

Net Salary = Gross Salary – Deductions

Similarly, The Present Value of all cash inflows is the Gross Present Value
and if you deduct cash outflows it becomes your Net Present Value.

30
Net Present Value

Criteria
If NPV > 0 (NPV is +ve, Accept the Project)

If NPV < 0 (NPV is –ve, Reject the Project)

If NPV = 0 (Accept the Project, considering other non tangible benefits)

Greater the NPV, Better the Prospects

31
Example1: Calculating NPV
A sum of $ 400,000 dollars invested today in an IT project may give a series of below cash inflows in future:

$ 70,000 in year 1
$ 120,000 in year 2
$ 140,000 in year 3
$ 140,000 in year 4
$ 40,000 in year 5

If Opportunity cost of capital is 8% per annum, then should we accept or reject the project?

Solution:
Step 1: Calculate the PV value of year 1, year2, year3, year4, and year5
Step 2: Sum up the PV of all years
Step3: NPV = Present value of all cash inflows – Present value of all cash outflow.
Step 4: If NPV is positive, Accept the project, if not Reject the project.
Example1: Calculating NPV

Cash Inflow of all Present Values is : $ 408,959

Present value of Cash outflow is : $400,000

Net Present Value 🡺 PV of Cash inflows – PV of Cash Outflows

🡺 ($408959 – $400000) = $8959 dollars.

Since NPV is positive, (i.e., $8959, This project can be accepted)

Example2: Calculating NPV
Same example: Calculating NPV however with Discount rate or Opportunity cost of capital at 15%
A sum of $ 400,000 dollars invested today in an IT project may give a series of below cash inflows in future:

$ 70,000 in year 1
$ 120,000 in year 2
$ 140,000 in year 3
$ 140,000 in year 4
$ 40,000 in year 5

If Opportunity cost of capital is 15% per annum, then should we accept or reject the project?

Solution: Calculating NPV

Step 1: Calculate the PV value of year 1, year2, year3, year4, and year5
Step 2: Sum up the PV of all years
Step3: NPV = Present value of all cash inflows – Present value of all cash outflow.
Step 4: If NPV is positive, Accept the project, if not Reject the project.
Example2: Calculating NPV

N.B: Though we have the

same inflow & outflow of cash
as in the previous example,
the NPV value changed with
the change in the Discount
rate of interest.
Therefore, NPV is very much
dependent on the Discount
rate or in other words the
opportunity cost of the capital
Cash Inflow of all Present Values is : $ 343591 value.
Present value of Cash outflow is : $400,000

Net Present Value 🡺 PV of Cash inflows – PV of Cash Outflows

🡺 ($343591 – $400000) = $ -56408 dollars.
(negative
56408 dollars)

Since NPV is Negative, (i.e., - $56408, This project should be rejected)

Internal Rate of Return
Capital
Budgeting
Net Present Value

et urn
Internal Rate of R
Profitability Index

Payback Period

36
Internal Rate of Return (IRR)
 IRR 🡪 % of Return on investment.
 To put it simple: It is the percentage of Return of your investment.
 How do we calculate IRR?
 If you remembr from NPV example, we mentioned that the NPV is dependent on
Discounted rate
 If we increase the discount rate the NPV value decreases
 We need to increase /decrease the discount rate to a level where NPV becomes zero
 The discount rate at which NPV becomes zero is infact the Internal rate of return
 In other words, IRR is the opportunity cost at which the NPV becomes Zero.

37
IRR
Let’s say at 8%, Discount rate, the NPV is 5000

Discoun And
t Rate
Let’s say at 12%, Discount rate, the NPV is 0

Net Then 12% is the return, we are getting from the

Presen project
t Value
And

This 12% is called the IRR.

Internal Rate of Return (IRR)
Note:
 For Constant rate of Cash inflow for every year, Internal Rate of Return can be calculated with the help of a formula.
 For Uneven rate of Cash inflows for every year, IRR can be calculated by little trail & error adjustments.

Accept the project when Internal rate of return > Discount rate or Opportunity cost of capital.

Reject the project when Internal rate of return < Discount rate or Opportunity cost of capital.

May accept the project when Internal rate of return = Discount rate or Opportunity cost of capital.

39
Relationship between IRR, Discount rate and NPV

If IRR > Discount rate or Opportunity cost of capital 🡪 The NPV is always Positive.

If IRR < Discount rate or Opportunity cost of capital 🡪 The NPV is always Negative.

If IRR = Discount rate or Opportunity cost of capital 🡪 The NPV is Zero.

Note: As long as the NPV is Positive, the project is financially viable.

The moment that NPV becomes Negative, the Project is NOT financially viable.
Calculating Internal Rate of Return
Example:

The cost of a project is $1000. It has a time horizon of 5 years and the expected year wise incremental cash flows are:

Year 1 : $200
Year 2 : $300
Year 3 : $300
Year 4 : $400
Year 5 : $500

Compute IRR of the project. If opportunity cost of Capital is 12%, And tell us, should we accept the project?

Solution:
Step 1: Take “K” as 12% and calculate NPV value.
Step 2: If NPV < 0 then Project is NOT financially viable at 12% discount rate.
Step 3: If NPV > 0 then Project is financially viable at 12% however we need to know the actual IRR value,
so we need to increase the K value to and calculate the NPV, continue it till you reach a point where the
NPV becomes zero or close to zero.

Step 4: The “K” value at which NPV becomes Zero or “Near Zero” is the actual IRR (Internal Rate of
Return)
Calculating Internal Rate of Return

At Discount Rate of 12%, the NPV is 169 (positive)

At Discount Rate of 17.7%, the NPV is 0 (Zero), there fore the IRR is 17.7%

Since IRR > Discount rate, Project can be accepted

Profitability Index (PI)
Capital
Budgeting
Criteria
If PI > = 1, Accept the Project.
Net Present Value
If PI < 1, Reject the Project.

turn
Internal Rate of Re

For every dollar spent, how much are we getting back

Profitability Index
Payback Period

43
 Profitability Index
A sum of $ 25,000 invested today in a project may give a series of cash inflows in future as described below:
 $ 5000 in year 1
 $ 9000 in year 2
 $ 10,000 in each of year 3
 $ 10,000 in each of year 4
 $ 3000 in year 5
If the required rate of return is 12% pa,
what is the Profitability Index?

Profitability Index is 1.07 and since it

is greater than 1, we can accept the
project.

44
Payback Period
Capital
Budgeting
Net Present Value

turn
Internal Rate of Re

Profitability Index

Payback Period

45
Payback Period
The time it takes for the project to generate money to pay for itself.

Payback period is the number of years required to recover the cash outflow invested in the
project.

The project would be accepted if its payback period is less than the maximum or standard
payback period set by Industry, Senior Leadership.

In terms of Projects ranking, it gives highest ranking to the project with the shortest payback
period.

Note: In general, the discounted cash flow is not considered for Pay back period. Some do, but
most don’t!

46
Payback Period
A sum of $25,000 invested today in an IT project, may give a series of cash inflows in future as described below.

$ 5,000 in year 1
$ 9,000 in year 2
$ 10,000 in each of year 3
$ 10,000 in each of year 4
$ 3,000 in year 5

What is the Payback Period (Non-discounted)?

Payback Period (Non-discounted) = In between 3 years 1 month and 3 years 2 months

47
Important: Few tips to Remember

✔ Always choose projects with highest NPV.

✔ If NPV is same for the given projects, choose the project with highest IRR.
✔ If NPV, IRR remains the same for the given projects, choose the projects with
early pay back period.
✔ NPV = All Cash Inflows – Cash Outflows
✔ PI = All Cash Inflows / Cash Outflows
✔ IRR = Discount rate at which the NPV becomes zero, this tell us what is the
percent of return for the project.
✔ Payback period is a major consideration for every project, business or
organization, it tells us how soon we can recover our investment and this
investment can be utilized for other business needs/projects later on.
Quick Recap – Concepts Learned

• Opportunity Cost / Discounted Cash flow

• Time Value of Money
• Calculating Future value
• Calculating Present value

Based on the above concepts, we learnt how to solve

• Capital Budgeting techniques.

✔ Net Present Value - NPV

✔ Internal Rate of Return - IRR
✔ Profitability Index – PI
✔ Payback Period - PBP
Insert Function
 Click the Insert function button fx.
 You may type in a description or
search.

Example for
COUNTIF
function
 Logical Functions
 =IF(condition, value if true, value if false) – a
returns one value if the condition is true and
another if the condition is false,
 =AND(condition1, condition2, …) – returns TRUE
if all conditions are true and FALSE if not,
 =OR(condition1, condition2, …) – returns TRUE
if any condition is true and FALSE if not.
IF Function
 =IF(condition, value if true, value if false)
 Conditions may include the following:
= equal <> not equal to
> greater than >= greater than or equal to
< less than <= less than or equal to
 You may nest up to 7 IF functions, replacing the value if false with
another IF function
 Example:
=IF(A8 =2,(IF(B3 =5,”YES”,“ ”)),15)
 Example 2.4 Using the IF Function

 Suppose that orders with quantities of at least 10,000 units are classified as
Large.
 Cell K4: =IF(F4>=10000, “Large”, “Small”)
 Suppose that large orders with a total cost of at least $25,000 are
considered critical.
 Cell L4: =IF(AND(K4=“Large”, G4>=25000),“Critical”,“”)
Debate: The Role of Microsoft Excel in
Modern Work Environments
 Argument:
 Versatility: Microsoft Excel is one of the most versatile
and widely-used software applications in the business
world. It offers a wide range of functionalities, from
basic data entry and calculations to complex data
analysis, visualization, and modeling.
 Ease of Use: Excel's user-friendly interface and intuitive
features make it accessible to users of all skill levels.
 Data Analysis and Visualization: Excel excels (pun
intended) in data analysis and visualization. With
powerful features such as pivot tables, charts, and
graphs, users can easily summarize and visualize
complex data sets.

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 1-54

Opponent Argument:
 Limitations in Handling Big Data: While
Excel is effective for managing small to
medium-sized datasets, it struggles with
handling large volumes of data.
 Version Control and Collaboration
Challenges: Excel's file-based nature
poses challenges in version control and
collaboration.
 Security Risks: Excel files are prone to
security risks, including unauthorized
access, data breaches, and malware
attacks.
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 1-55
 Lookup Functions for Database
Queries
 These functions are useful for finding specific data in a spreadsheet.
 =VLOOKUP(lookup_value, table_array, col_index_num, [range lookup]) -
looks up a value in the leftmost column of a table and returns a
value in the same row from a column you specify
 =HLOOKUP(lookup_value, table_array, row_index_num, [range lookup]) -
looks up a value in the top row of a table and returns a value in the
same column from a row you specify.
 =INDEX(array, row_num, col_num) - returns a value or reference of
the cell at the intersection of a particular row and column in a
given range.
 =MATCH(lookup_value, lookup_array, match_type) - returns the
relative position of an item in an array that matches a specified
value in a specified order
Important Notes on Lookup
Functions
 In the VLOOKUP and HLOOKUP functions, range lookup is
optional. If this is omitted or set as True, then the first
column of the table must be sorted in ascending
numerical order.
 If an exact match for the lookup_value is found in the
first column, then Excel will return the value the
col_index_num of that row. If an exact match is not
found, Excel will choose the row with the largest value
in the first column that is less than the lookup_value.
 If range lookup is False, then Excel seeks an exact
match in the first column of the table range. If no exact
match is found, Excel will return #N/A (not available).
 We recommend that you specify the range lookup to
avoid errors.
 Example 2.5 Using the VLOOKUP
Function

=VLOOKUP(10007, $A$4:$H$475,3) returns the payment type Credit.

=VLOOKUP(10007, $A$4:$H$475,4) returns the transaction code 80103311
INDEX Function

 =INDEX(array, row_num, col_num)

 The INDEX function works as a lookup procedure by
returning the value in a particular row and column of an
array. For example, in the Sales Transactions database,
 INDEX($A$4:$H$475, 7, 4) would retrieve the
transaction code 80103311, which is in the 7th row and
4th column.
MATCH Function
 =MATCH(lookup_value, lookup_array, match_type)
 In the MATCH function, lookup_value is value that you want to
match in lookup_array, which is the range of cells being searched.
The match_type is either -1, 0, or 1. The default is 1.
 If match_type = 1, then the function finds the largest value that is
less than or equal to lookup_value.
 The values in the lookup_array must be placed in ascending order.
 If match_type = 0, MATCH finds the first value that is exactly
equal to lookup_value.
 The values in the lookup_array can be in any order.
 If match_type = -1, then the function finds the smallest value
that is greater than or equal to lookup_value.
 The values in the lookup_array must be placed in descending order.
 Example 2.6 Using INDEX and MATCH
Functions for Database Queries

Suppose we wish to design a simple query application to

input the month and product name, and retrieve the
corresponding sales. The three additional worksheets in
the workbook show how to do this in three different ways.
Example 2.6: Using VLOOKUP +
IF
The Query1 worksheet uses the VLOOKUP function with
embedded IF statements. The formulas in cell I8 is:
=VLOOKUP(I5,A4:F15,IF(I6="A",2,IF(I6="B",3,IF(I6="C",
4,IF(I6="D",5,IF(I6="E",6))))),FALSE)
Example 2.6: Using VLOOKUP +
MATCH
The formula in cell I8 is:
=VLOOKUP(I5,A4:F15,MATCH(I6,B3:F3,FALSE)+1,FALSE)
In this case, the MATCH function is used to identify the column in
the table corresponding to the product name in cell I6. Note the use
of the “+1” to shift the relative column number of the product to the
correct column number in the lookup table.
Example 2.6: Using INDEX + MATCH

The formula in cell I8 is:

=INDEX(A4:F15,MATCH(I5,A4:A15,FALSE),MATCH(I6,B3:F3,FALSE)+1)
The MATCH functions are used as arguments in the INDEX
function to identify the row and column numbers in the table based
on the month and product name. The INDEX function then
retrieves the value in the corresponding row and column.
Spreadsheet Add-Ins for
Business Analytics
 Microsoft Excel provides a number of add-ins for Business Analytics
(Windows only), which will be used in subsequent chapters:
- Analysis Toolpak
- Analysis Toolpak VBA
- Solver
 To install them, click the File tab and then Options in the left column. Choose Add-
Ins from the left column. At the bottom of the dialog, make sure Excel Add-ins is
selected in the Manage: box and click Go. In the Add-Ins dialog, if Analysis Toolpak,
Analysis Toolpak VBA, and Solver Add-in are not checked, simply check the boxes and
click OK.
 Frontline Systems provides:
- Analytic Solver Platform
 See the Preface for installation instructions
Case lets: Financial Analysis
in Excel
 How would you calculate the total
revenue, total expenses, and total profit
for the year?
 What Excel functions or formulas would
you use to calculate the average monthly
revenue, average monthly expenses, and
average monthly profit?
 How would you create a line graph in
Excel to visualize the trend in monthly
sales revenue over the past year?
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 1-66