AGB 260: Agribusiness Information Technology Business Modeling and Analysis

Useful Chapters in the Textbook Regarding this Lecture  Chapter 35  Chapter 36  Chapter 37  Appendix

Important Finance Concept- Future Value  Problem: Suppose you want to find the sum that a present amount of money will grow to by the end of the n th interest period.  Formula: FV n = PV(1 + r) n  Where FV n = future sum to be received at the end of n periods  PV = present amount  r = compound interest rate and  n = number of periods.

Important Finance Concept- Present Value  Problem: Suppose you wanted to know what is the present value of a sum to be received in the future?  Formula: PV = FV/(1 + r) n  Where PV = the current value of a future amount at the end of n periods  FV = future amount  r = compound interest rate and  n = number of periods.

Important Finance Functions  FV(rate,nper,pmt,[pv],[type])  This function tells you what the future value of a set of payments are and/or the future value of an initial lump sum  Rate is the compounding interest rate.  Nper is the total number of payment periods.

Important Finance Functions Cont.  Pmt is the periodic payments you will receive.  Pv is the current value of the investment and is an optional argument.  Type is an optional argument where a 0 represents a payment at the beginning of the period and 1 represents the payment being received at the end of the period.

Important Finance Functions Cont.  PV(rate,nper,pmt,[fv],[type])  This function tells you what the present value of a set of payments are and/or the present value of a lump sum receive in year n  Rate is the compounding interest rate.  Nper is the total number of payment periods.

Important Finance Functions Cont.  Pmt is the periodic payments you will receive.  Pv is the current value of the investment and is an optional argument.  Type is an optional argument where a 0 represents a payment at the beginning of the period and 1 represents the payment being received at the end of the period.

Important Finance Functions Cont.  NPV(rate,value1,[value2],…)  This calculate the net present value of a stream of returns starting at year 1.  This function is similar to the PV() function except that it can handle different payments.  Rate is the one period discounting factor.  Value1 is the net return you receive in year 1.

Important Finance Functions Cont.  This function assumes that your returns are equally spaced.  Suppose you want to know what it is worth for you today to receive 1,000,000 over the next 20 years.

Important Finance Functions Cont.  IRR(values,[guess])  IRR returns the internal rate of return of a series of cash flows.  This represents the interest rates that gives you a net present value of 0.  Values represents the different cash flows over the periods.  Guess is an optional argument that represents a starting rate that you want the function to start with.

Important Statistical Functions for Simulation  RAND()  This function calculates a random number from 0 to 1 which is uniformly distributed.  This random number generator can be used to do simulation of random events using Excel.  NORM.DIST(x,mean,standard_dev,cumulative)  This function returns what is the probability density or cumulative probability of event x occurring given a mean and a standard deviation for a normally distributed variable.

Important Statistical Functions for Simulation Cont.  NORM.S.DIST(z,cumulative)  This function returns what is the probability density or cumulative probability of event z occurring for a standard normally distributed variable.  NORM.INV(probability,mean,standard_dev)  Returns the inverse of the normal cumulative distribution given a probability, a mean, and a standard deviation.  This function coupled with RAND() can generate normally distributed random numbers.

Important Statistical Functions for Simulation Cont.  NORM.S.INV(probability)  Returns the inverse of the standard normal cumulative distribution given a probability.

What-If Analysis  Excel has the ability to examine different scenarios that can occur using its What-If analysis tools  These tools include:  Scenario Manager  Goal Seek  Data Table

Scenario Manager  Scenario Manager allows you to see what happens to result cells if you change different parameters within your spreadsheet model.  This tool is very useful when you want to examine more than two changes occurring at once or you want to keep track of multiple cells that could change due to the different scenarios.

Goal Seek  Goal Seek is a tool in Excel that can help you find values that will meet a specific goal in your spreadsheet.  Goal Seek has three inputs:  Set Cell  To Value  By changing cells

Data Table  Data Table is a tool in Excel that can methodically change one or two cells in your spreadsheet and report a value due to those changes.  It is an excellent tool for making contingency tables for one or two variables.  Data Table has two inputs:  Row input cell  Column input cell

Solver  Solver is an add-in tool that does linear and non-linear optimization potentially given a set of constraints.  Solver has four sets of information that needs to be entered into it:  Set Objective  To  By changing variable cells  Subject to the constraints  Select solving method

Data Analysis Add-In  Excel has a Data Analysis add-in that allows you to do many different types of preprogrammed statistical analysis including:  Regression  Descriptive Statistics  Histograms  Different testing of means  Moving average  Much of this analysis can be done with the standard Excel functions.