1. 12/10/2015 1 Business Software Tools 200 Topic 2 Modelling

2. Why Model? 12/10/2015 2

3. Why Model? Focus on key aspects Perform “What if?” (sensitivity analysis) Make predictions Improve (shared) understanding Reduce uncertainty Solve problems… 12/10/2015 3

4. Good models Are parsimonious Have just enough variables to explain the variation Too many variables create complexity and confusion and may mislead (model is overfitted) Too few variables don’t explain (model is underfitted) 12/10/2015 4

5. Good models ctd. Provide explanation Give accurate predictions Correlate with the “real world” Have face validity Are scalable, extensible Understandable by others documentation 12/10/2015 5

6. 6 Modelling financial forecasting simulation/risk analysis MCDM (multi criteria decision making) goal seeking/optimisation/linear programming

7. Excel Add-Ins Analysis ToolPak Solver 12/10/2015 7

8. Excel Add-Ins 12/10/2015 8

9. 9 Financial models “adjusting for the time value of money based on interest, depreciation, inflation rates” NPV (net present value) IRR (internal rate of return) DCF (discounted cash flow) Amortisation (loan repayments)

10. 12/10/2015 10 Financial models Software Excel financial functions

11. 12/10/2015 11 Forecasting “predicting future values based on past patterns of a time series” trend regression exponential smoothing decomposition Box Jenkins

12. 12/10/2015 12 Forecasting Software Excel statistical functions

13. 12/10/2015 13 Simulation/Risk Analysis “either the modelling of a process or a form of sensitivity analysis where many “what ifs” are performed” Systems Dynamics dynamic based on store/flow/control difference equations

14. 12/10/2015 14 Simulation/Risk Analysis Monte Carlo variation of given variables according to an assumed statistical pattern static Example software @Risk by Palisade Works with Excel http://www.palisade.com.au/risk/

15. 12/10/2015 15

16. 12/10/2015 16 Simulation/Risk Analysis discrete snapshot of model is triggered by an event continuous snapshot of model is triggered at regular time intervals visual interface iconic abstract.... real

17. 12/10/2015 17 Regression statistical model dependent, independent variables may be time based software See excel statistical functions and Data analysis toolpack add-in

18. Regression (Excel) 12/10/2015 18

19. 12/10/2015 19 MCDM (multi criteria decision making) “exploration of the pain and gain associated with different alternatives” alternatives criteria rating of alternatives weighting of criteria exploration

20. 12/10/2015 20 MCDM ctd Software Hiview3 by Catalyze http://www.catalyze.co.uk/resources/doc s/pdf/Catalyze_Case_Study_Shampoo.p df http://www.catalyze.co.uk/resources/doc s/pdf/Catalyze_Case_Study_Shampoo.p df See next slide copied from the above pdf

21. 12/10/2015 21 Hiview3 – Criteria hierarchy

22. 12/10/2015 22 Goal Seeking/Optimisation/Linear Programming “either the search for the pattern of variables that will lead to a goal or the pattern of variables that will optimise a goal under given constraints” Software Goal seek (in Excel “What if Analysis”) Excel Add In – Solver (optimisation under constraints)

23. Goal seek – E.g. Find a Break even point New Perspectives on Microsoft Office Excel 200723

24. Working with What-If Analysis and Goal Seek New Perspectives on Microsoft Office Excel 200724

25. Solver (Excel) 12/10/2015 25

26. 12/10/2015 26 Sensitivity Analysis (“What if”) “The performing of “what if” analysis in a given model through varying underlying variables” fixed values interval/increments according to a statistical pattern

27. Excel (What if Analysis) 12/10/2015 27

28. Excel (What if Analysis) 12/10/2015 28