61FIN3FMO – FINANCIAL MODELING

LAB ACTIVITIES 5 – SIMULATION MODELS

Concept to be learned: Analytical skills, Sensitivity analysis.

Skills to be learned: Nested IF, Goal seek, NPV, IRR, Data table.
Activity: NPV profiles.
Two projects with the same risk level and the following information:
➢ Both projects have a maturity of 15 years and the weighted average cost of capital
(WACC) applied to both projects is 10%.
➢ Project A:
• Initial investment: $200,000
• No cash flows until the 5th year.
• Constant cash flows of $65,000 at the end of the 6th year and onwards.
➢ Project B:
• Initial investment: $145,000
• No cash flows until the 3rd year.
• Cash flow of $35,000 at the end of the 4th year, growing at a constant rate of 3%
per year until maturity.
Requirement:
1. Create a model divided into three sections: Input, Calculation, and Output.
2. Calculate NPV of both projects.
• Identifying variables.
• Linking variables using NPV function.
• Calculating NPV of both projects.
• Ensure the results will change automatically if input values are modified.
3. Find Crossover Rate using Goal-Seek and IRR function.
4. Sensitivity Analysis - NPV Profile
• Create two one-way data tables to graph the NPV profile of both projects.
• Vary the discount rate from 5% to 15% in increments of 1%.
5. Graph NPV Profile of two projects using Line Chart
 INSTRUCTION FOR NESTED IF, GOAL SEEK AND DATA TABLE.
1. NESTED IF
A Nested IF function is a logical function in Excel that allows you to test multiple
conditions and return different values based on the results of those conditions. It's a way to create
more complex decision-making logic in your spreadsheets.
Project A:
Since the cash flow of this project will not commence in the first year, we need to specify
within our calculation section, where the timeline is displayed, the year from which we will begin
receiving our initial cash flow. This can be achieved by implementing an IF function that checks
whether the period exceeds the year we have entered in our input section.
The proposed function is as below:
IF(current year less than year to start return CF, value if true = 0, value if false = CF)
Project B:
Given that the cash flow of this project won't initiate in the first year and there's also a
consideration for growth rate, we will initially create a similar IF function as in Project A.
However, the value if true condition must be adjusted to reflect a cash flow with a growth rate if
the current year exceeds the time specified in our input section.
The proposed function is as below:
IF(current year less than year to start return CF, value if true = 0, value if false =
CF*(1+growth rate)^year)

2. GOAL SEEK
Goal Seek is used to determine the value of a specific input that will result in a desired
output. In our case, we want to find the discount rate at which the NPV of both projects becomes
equal.
Steps to use Goal Seek:
1. Identify Your Objective: Determine the target value we want to achieve. In this
case, we want to find the discount rate that makes the NPV of both projects equal (crossover rate).
2. Set Up Your Worksheet:
• Place the NPV formulas for both projects in a cell where we can track the difference
between the two NPVs.
 • In another cell, set up a formula that calculates the absolute difference between the
two NPVs.
3. Access Goal Seek:
• Go to the "Data" tab in the Excel ribbon.
• Look for the "What-If Analysis" option.
• Choose "Goal Seek."

4. Goal Seek Dialog Box:

• Enter the cell containing the difference in NPVs as the "Set Cell."
• Set the "To value" to zero (since you want the difference to be zero).
• Choose the cell with the discount rate as the "By changing cell."
• Click "OK."

5. Review Result:
• Excel will iterate to find the discount rate that makes the difference in NPVs zero.
• Once the calculation is complete, the "Goal Seek Status" dialog will show the result.
 3. DATA TABLE
A Data Table allows us to explore different scenarios by varying one or two input variables
across a range of values, generating multiple corresponding outcomes.
Steps to use Data Table:
1. Set Up Data Table Area:
• Create a table with a column for the varying input (discount rate) and a cell for each
project's NPV.
• You can set up the varying discount rates in a column and use formulas to calculate
NPV for each project beside each rate.
2. Select Data Table Area:
• Highlight the range of the discount rates and the NPVs.
3. Access Data Table:
• Go to the "Data" tab in the Excel ribbon.
• Look for the "What-If Analysis" option.
• Choose "Data Table."
4. Data Table Dialog Box:
• For "Column input cell," select the cell containing the varying discount rates.
• Click "OK."
5. Review Result:
• Excel will populate the NPVs for both projects across the range of discount rates
you specified.
• You can visualize the NPV profiles by creating a line chart.
The suggested model should appear as shown. Please note that this suggested model is not the
definitive "best" model; you are encouraged to create and arrange your model according to your
preferences.
The effectiveness of your model will account for 70% of your evaluation, while model efficiency
will account for the remaining 30%.