Next generation excel modeling in excel for analysts and MBAs, 2nd edition

Formulas, Functions, and Relative and Absolute Addressing 21Naming Cells and Ranges 31 Appendix: Using the Names Menu in Excel 2003 and Mac Excel 2011 38 vii... CHAPTER 12Statistical Reg

Next Generation

Founded in 1807, John Wiley & Sons is the oldest independent publishing company inthe United States With offices in North America, Europe, Australia and Asia, Wiley isglobally committed to developing and marketing print and electronic products andservices for our customers’ professional and personal knowledge and understanding.The Wiley Finance series contains books written specifically for finance andinvestment professionals as well as sophisticated individual investors and theirfinancial advisors Book topics range from portfolio management to e-commerce,risk management,financial engineering, valuation and financial instrument analysis,

as well as much more

For a list of available titles, visit our Web site at www.WileyFinance.com

To my father, Yeshayahu Gottlieb, and to Gilda, Edon, Sivan, David, Jonah, Ruby, and Lev

Copyright ª 2013 by John Wiley & Sons Singapore Pte Ltd.

Published by John Wiley & Sons Singapore Pte Ltd.

1 Fusionopolis Walk, #07-01, Solaris South Tower, Singapore 138628

All rights reserved.

First edition published by John Wiley & Sons Singapore Pte Ltd in 2010.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as expressly permitted by law, without either the prior written permission of the Publisher, or authorization through payment of the appropriate photocopy fee to the Copyright Clearance Center Requests for permission should be addressed to the Publisher, John Wiley & Sons Singapore Pte Ltd., 1 Fusionopolis Walk, #07-01, Solaris South Tower, Singapore 138628, tel: 65–6643–8000, fax: 65–6643–8008, e-mail: enquiry@wiley.com.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts

in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and speci fically disclaim any implied warranties of merchantability or fitness for a particular purpose No warranty may be created or extended by sales representatives or written sales materials The advice and strategies contained herein may not be suitable for your situation You should consult with a professional where appropriate Neither the publisher nor author shall be liable for any loss of pro fit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

Microsoft and Excel are registered trademarks of Microsoft Corporation.

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Typeset in 10/12pt SabonLTStd by MPS Limited, Chennai, India

Printed in the United States of America.

“For wisdom is better than rubies, and all the things

Bible, Proverbs (Chapter VIII, Verse 11)

Formulas, Functions, and Relative and Absolute Addressing 21

Naming Cells and Ranges 31

Appendix: Using the Names Menu in Excel 2003 and Mac Excel 2011 38

vii

CHAPTER 5

Conditional and Advanced Conditional Formatting in Excel 45

Appendix: Generating Charts in Excel 2003

CHAPTER 12

Statistical Regression 131

Appendix: Using the Chart Feature to Create a

Appendix: Using Data Analysis in Excel Mac 2011 and Excel 2003 148

CHAPTER 14

Data Analysis —Multi-Regression 151

PART FOUR

CHAPTER 15

Naming Cells —For Meaningful Decision Making and Modeling 167

Appendix: Create and Apply Names in Excel 2003

Appendix: Sensitivity Analysis—One- and

Two-Way Data Tables for Excel 2003

CHAPTER 18

Using Scroll Bars for Sensitivity Analysis 199

Appendix: Adding a Scroll Bar in Excel 2003, 2007,

CHAPTER 20

Data Forms and Features Eliminated in Excel 2007 and 2010 249

Appendix: The Data Form in Excel 2003 or

CHAPTER 24

Group and Outline Data 255

Appendix: Group and Outline Data Excel 2003

CHAPTER 25

Excel Subtotals 263

One More Example—Function Applied to Multiple Categories 265

Appendix: Creating Subtotals in Excel 2003 and Mac Excel 2011 269

Data Mining Using Pivot Tables 289

NPV and IRR —Evaluating Capital Investments 309

CHAPTER 30

Unconventional Financial Functions: XNPV and XIRR 315

Excel XNPV—The Net Present Value Function for Uneven Intervals 315Excel XIRR—The Internal Rate of Return Function for Uneven Intervals 316

CHAPTER 31

Frequently Used Financial Functions 319

CHAPTER 33

Accounting Depreciation Functions 337

Appendix: Using the Solver in Excel 2003 and Mac Excel 2011 349

I am pleased to write the foreword to this very practical and important book onExcel by Professor Isaac Gottlieb As Dean of the Fox School of Business at TempleUniversity in Philadelphia, I have personally known Dr Gottlieb for several yearsand can attest to his deep knowledge in this field Excel is one of the most robustbusiness application tools of our time, and Professor Gottlieb is one of the foremostexperts in Excel Professor Gottlieb teaches Statistics and Excel to graduate andundergraduate students at Temple University He is very passionate about teachingand receives rave reviews in his classes This book utilizes not only his many years ofusing Excel on both PC and Apple, but also his teaching of courses and workshops inmany universities and corporations across the world The many questions that havebeen asked of him, including those sparked by his“tips of the month,” are distilled

in this book

This book distinguishes itself in a number of ways Even though the book utilizesthe latest version of Excel (2010), it explains how it differs from—and how to workout the same tasks with—previous Excel versions (2007 and 2003) It even has aspecial appendix in every chapter for Excel for Mac 2011, which has becomeincreasingly popular Every topic and chapter includes real-world cases using themost efficient Excel modeling to solve them Chapters are followed by reviewquestions and solutions

This book covers a number of concentrations most analysts and business dents use today: finance, accounting, statistics, data mining, operations management,and analytic techniques for decision-making The capstone appendix is a detailedsupply chain management case study that combines all the techniques coveredthroughout the book

stu-The majority of Excel users take advantage of only a very small portion of thesoftware This book, with 35 chapters covering a variety of topical areas, unleashesthe incredible capacity and potential of Excel Professor Gottlieb’s thorough expla-nations of these topics and hundreds of actual screenshots enhance readers’ ability

to understand and see how routines are performed and displayed This book will beuseful to all who utilize Excel in their daily lives, be they casual users, students orprofessionals

M Moshe Porat, Ph.D., CPCU

DeanLaura H Carnell Professor

Temple University

xv

When you get to the heart of the matter, you will find that the author is speaking

to the reader, as I am doing now This book was voluntarily written in a veryinformal tone, to keep the learning process as dynamic as it can be in a classroom orworkshop setting

I wanted to create a book that appeals to students, as well as practitioners andinstructors All the techniques in this book have been developed first with the pro-fessors and students who attended my classes and workshops What is in this book isthe distillation of the feedback of many years’ teaching I have learned what peoplereally want to know about Excel One thing is certain: They don’t want to read long,complicated explanations They want a simple answer with visual figures or pictures;therefore, this book is filled with short explanations and screen shots It is organized

in a way to help you hit the ground running, and quickly at that!

I have verified the application of this book’s subject matter outside of theclassroom—in putting together projects, generating business plans, and other decision-making instances I have applied the various techniques time after time in a variety

of consulting projects All the examples in this book are the direct result of real-life,hands-on experience

Most people who use Excel want and need fast answers to their problems Thespecial features of the Excel software are covered in a manner inviting the user toapply the knowledge immediately

While the book is written with Excel 2010 and 2007 in mind, most chaptershave an appendix for Excel 2011 for Mac, Excel 2003 or earlier versions, when thelatest version implied different manipulations of the software Every chapter has afew review questions at the end (with the answers!) to ensure that you reallyunderstand what you have read, by applying the knowledge to different problems

to be solved than the ones covered in the chapter I cannot encourage you enough to

do these exercises

WHO SHOULD READ THIS BOOK?

You will find this book useful if you

n Spend more than 10 hours a week using Excel—you will save hundreds of hours

a year applying this knowledge

n Are a decision maker at any level—you will improve your decision-making ability

xvii

n Are an analyst in the areas of accounting, finance, marketing & sales, HR,

or strategy—you will learn to handle your analysis in a more efficient andcreative way

n Have to make quantitative or graphical presentations

n Are an executive and have to train your staff in time-saving process applications

n Are an executive assistant—you can better support management with yourimproved skills

n Are an entrepreneur and need to create business plans

n Are dealing with accounting, marketing/sales, HR, finance, or other businessdisciplines

n Are a student or plan to become one

n Will be in a position to have to train people to use Excel

OVERVIEW OF THE CONTENTS

This book has eight parts Read it in order or feel free to jump directly to any of theparts

Part One explains how to use Excel efficiently It covers the AutoFill, efficientselection, and highlighting functions in Excel You will also learn how to use key-board selection shortcuts The second topic covered shows how to insert formulas orfunctions and the use of absolute versus relative addressing The last two chaptersdescribe the naming of cells and ranges and how one creates charts You will alsofind a chapter on conditional formatting and a chapter about advanced charts andsparklines

Part Two covers two commonly needed skills: the use of the IF functions, whichmake Excel an invaluable tool for decision-making purposes, and the Text manip-ulation functions

Part Three introduces Statistical Tools Statistics in Excel provide the user with aset of tools helpful in sorting out and solving a variety of problems This part coversdescriptive statistics and simple regressions You will also find a new chapter cov-ering Multi Regression

Part Four is called What-If Analysis What-if analysis enables the user to find outwhat will be the impact of change This part of the book shows you how to takeadvantage of the what-if tools in the decision-making process It demonstrates fea-tures such as naming cells for modeling, the goal seek, one- and two-way data tables,and the effective use of scroll bars

Part Five covers two chapters, Multi-Page Systems and Lookups Most Excelusers either keep their entire model or information on one worksheet or—when theyuse a number of sheets—do not take advantage of structuring the workbook/system

so that they can use Excel more effectively Studying the Multi-Page chapter willremedy this shortcoming

The second portion of Part Five discusses lookup functions It demonstrates how

to perform an exact lookup and how to perform range lookups After you stand the lookup function described, you will be able to perform any of the otherlookup functions

under-Part Six loosks at the Data menu and ribbon This part of the book deals with theData menu features of Excel It covers all the following topics: Sorting data, Filters,

Creating and Using Data Forms, Grouping Data, Subtotals, and Pivot Tables Thisedition has a new chapter covering the Pivot Table Slicer.

Part Seven deals with the variety of Financial Tools Excel comes equipped with.What are the most frequently used financial formulas available, including those in theAnalysis ToolPak, and how do we apply them using Excel efficiently?

Part Eight explains how to use the Solver Add-in Solver is an Excel Add-in,which, in very simple terms, is a software tool for“solving” mathematical systems ofequations for optimizations This part of the book does not attempt to teach themathematical aspect of using the Solver, but it does demonstrate how to put it togood use for three different applications The first application explains how to use theGoal Seek when you want to have more than one changing cell or decision variable.The second application demonstrates efficient use of the Solver for a linear optimi-zation problem The last case explains its use in a nonlinear optimization problem.Appendix A has a comprehensive Summary Case Study to review and practicemany of the topics covered in the book

ADDITIONAL MATERIALS

All the Excel files and charts mentioned in the chapters are available for download.Please visit this book’s companion website at www.wiley.com/go/gottlieb (password:isaac123)

Special thanks to Ms Marianne Tan, who worked with us at our Executive MBAoffices in Singapore This book was actually her idea—she took the notes I give tostudents and handed them (to my great pleasure!) to Ms CJ Hwu, Senior PublishingEditor at John Wiley & Sons (Asia) I am grateful to both for their support in thisendeavor

I am grateful also to Ms Lucie Alary for the countless hours spent proofreadingthe chapters’ drafts, before they took the shape of a book In her meticulous manner,she read the text, made suggestions, and pointed out many details that haveimproved the book a great deal She was also gracious enough to read the newchapters of this second edition

Also thanks to my friends Avi Miller and Manny Zachodin They acted as mysounding board as I developed the material for my Excel workshops and through theprocess of writing this book They have been teaching MBA and other workshopswith me for the last 15 years using the material in this book Their wisdom, expe-rience, and feedback enabled me to improve the quality of many of the topics cov-ered I am grateful for their time, effort, and of course, their friendship

The usual disclaimer is in order: Any mistakes in the work are my own

xxi

One

Using Excel Efficiently

Part One describes how Excel, the widely used spreadsheet software, can be usedefficiently to help build your spreadsheet for a variety of purposes As an MBAstudent, an analyst, or an executive, you will develop enough expertise to performthe same tasks you were performing before—using other means—much faster and in

a more efficient way This part of the book demonstrates tools, shortcuts, andtechniques for carrying out some common tasks quickly and efficiently

This part will not turn you into an Excel expert in a short time, but by the endyou should improve the tasks you can do—the types of tasks that make Excel intosuch an incredibly powerful and flexible tool for modeling, finance, statistics, anddata manipulation

In Part One: Using Excel Efficiently, we cover the AutoFill feature, efficientselecting, and highlighting in Excel You will also learn how to use keyboardselection shortcuts The next topic covered is how to insert formulas, activatefunctions, and use absolute and relative addressing The last three parts are thenaming of cells and ranges, formatting and conditional formatting, and creatingsimple as well as complicated charts and Sparklines

1

CHAPTER 1

AutoFill

The AutoFill feature in Microsoft Excel can automatically fill in cells withcommonly used series (numbers, months, and days of the week) or with customlists you can create This chapter demonstrates how to use the drag handleand other ways to fill in information These operations work in all directions:top down, down up, left to right, and right to left Figure 1.1 demonstrates thisfeature

Select two adjacent cells and release the mouse When you hover again over thelower right corner, your mouse pointer should change shape to a crosshair (þ) called

a drag handle You can click and drag down the column and Excel will continue theinitial two-cell series for you

You can AutoFill several types of data including, but not limited to, numbers,dates, days, and annual quarters by selecting cells and dragging the handle as shown

in Figure 1.1

By default, a number of AutoFill lists are pre-installed in the program For a list

of the available AutoFill series, in the 2010 version we use the File icon to get to theExcel Advanced Options menu and the Custom Lists menu See Figure 1.2 For 2007

go to the Windows icon, click on Excel Options, and click on the Edit Custom Listsbutton See Figure 1.2

You may add your own lists as needed to Custom Lists This is explained at theend of the chapter

Try to use the following example for using the Custom Lists shown in Figure 1.3

We filled in the information in the sheet You may want to open the AutoFill sheet inthe Excel file for Chapter 1 on the web page The example illustrates the use of theAutoFill feature in Excel

Select the first two values in column B (B2 and B3), click on the lower right draghandle of cell B3, and pull the drag handle down toward cell B10

Dragging down the information created the desired AutoFill effect of continuingwith the same series of numbers: 6, 9, 12, 15, , 30 Try to drag down theinformation shown in columns C and D You will create the information shown inFigure 1.4

After you experiment with a couple of columns, try a more efficient way: selecttwo vertical adjacent cells E2:E4 Release the mouse for a moment Go to the draghandle This time, do not drag—just double-click Excel will drag it down for you.See Figure 1.5 It will complete filling for you to the end of the adjacent column onthe left You may try double-clicking with more than one column selected at a time.Double-click works only in one direction: down

3

You may want to try it yourself As shown in Figure 1.6, all of the columnsselected are highlighted and the crosshair handle appears at the lower right corner

of the final column In Figure 1.7, you can see the results after using the AutoFilldouble-click

More features of the AutoFill function are discussed in the context of regressions

in Chapter 12 I also explain the concept of Time in Excel in Chapter 12

Creating Custom Lists in Excel enables you to use these lists as demonstratedwith the AutoFill function Custom Lists let you use them when you sort in Excel Inaddition to sorting in numerical or alphanumeric order, you can also sort with theseCustom Lists or with the ones you create You can use the list created here later tosort a database

To create a Custom List in Excel, you need to type the list in a range on a sheet

as shown in Figure 1.8 I used a list of the 10 largest cities in the United States whereyour company may be doing business as an example

Refer to Figure 1.2 for how to access the Custom Lists menu In Excel 2010, go

to the File icon to get to the Excel Advanced Options menu and the Custom Listsmenu For Excel 2007, go to the Office icon, click on Excel Options, and click onthe Edit Custom Lists button The result is shown in Figure 1.9 For Excel 2003

or the Mac 2011 version, see the Appendix to this chapter

Now all you have to do to make the list of the 10 largest cities in the UnitedStates, sorted by population size, part of your Excel Custom List, is click onthe empty cell on the menu to the left of the Import button and select the cells on thesheet Click on the Import button and the list is now part of your Custom Lists SeeFigure 1.10

FIGURE 1.1 Using the Drag Handle

FIGURE 1.2 Custom Lists

FIGURE 1.3 Drag Handle and AutoFill

FIGURE 1.4 “Dragging” Down the Information

FIGURE 1.5 Double-Click the Drag Handle

FIGURE 1.6 Highlighting More than One Column

FIGURE 1.7 AutoFill Results

FIGURE 1.8 Custom List Example

FIGURE 1.9 Create a Custom List

AUTOFILL OPTIONS

When you complete dragging any of the AutoFill lists, you will see a small Optionsicon at the bottom right of the list When you click on the icon, it will allow you tochoose one of the options See Figure 1.11

The AutoFill option recognizes days and dates When you click on the menu with

a list of dates or days of the week, Excel provides you with the additional options ofchoosing days, weekdays only—without weekends—or even spacing the list out,incrementing the dates by months or years See Figure 1.12

RIGHT-DRAG AUTOFILL

When you right-click and drag a numeric series, the menu offers you additionalfeatures as shown in Figure 1.13 The additional feature that could help us more thanthe others on the list is the Growth Trend feature We can think of many otherFIGURE 1.10 Custom List Results

applications once we understand what it can do The following are two examplesthat can illustrate the power of this element in Excel.

If you need to create an exponential list of the number 2, all you have to do istype the first two terms in the series (2 and 4) and the Growth Trend feature in the listwill create the series as show in Figure 1.14 It will result in 2, 4, 8, 16, and so on.Using this idea, we can create a compounded interest series If you want a growth

FIGURE 1.11 AutoFill Options

FIGURE 1.12 AutoFill Menu

factor of 10 percent a year, you can type 1.0 and 1.1 or 100 percent and 110 percentand the Growth Trend feature will do the rest as illustrated in Figure 1.14.

APPENDIX: AUTOFILL IN EXCEL 2003 AND EXCEL MAC 2011

Excel 2003

Custom Lists Menu: There are two examples shown in this chapter that areslightly different in Excel 2010 than in Excel 2003 Both examples deal with theprocedure to access the Custom Lists menu in Excel 2010 In the 2010 version weused the File icon to get to the Excel Advanced Options menu and the Custom Listsmenu

FIGURE 1.13 Choosing AutoFill Options

FIGURE 1.14 Exponential Trend Results

In Excel 2003, you click on the Tools menu and then select Options SeeFigure 1.15.

The Options screen appears and you can select the Custom Lists tab SeeFigure 1.16 All the other features of importing custom lists are the same as in Excel2010—as described above

FIGURE 1.15 Options Menu in Excel 2003

FIGURE 1.16 Custom Lists Menu in Excel 2003

Mac Excel 2011

In the Mac version of Excel, you click on the Excel menu and then select Preferences.The Excel Preferences menu has the Customs Lists Option See Figure 1.17.All the other features for importing custom lists are the same as in Excel 2010—

as described above See Figure 1.18

FIGURE 1.18 Custom Lists Menu in Excel 2011

FIGURE 1.17 Excel Preferences and the Customs List Option

REVIEW QUESTIONS

You will find these examples in the Excel Chapter 1 file:

1 The chapter problems sheet of Chapter 1 has the following data:

1 Select the twofirst figures, 1.5 and 1.6 Click on the grab handle and drag downuntil you see the value 10

2 a Select the rest of the table as you see in the figure

b Double-click on the grab handle

3 Click on the Office icon Select Excel Options at the bottom of the menu Click

on Edit Custom Lists in the middle of the menu (In Excel 2003, use Tools Options Custom Lists.) On the resulting menu, select the range K10:K19 andclick on Import

CHAPTER 2

Selecting Ef ficiently in Excel

Dragging the mouse is probably not the most efficient way of selecting a range inExcel If you select a small range, it may be more effective to hold the Shift keydown and use the arrow keys to select the range In many instances, you have toselect large ranges of data This chapter will describe a number of techniques to selectthis data in a more efficient way

Selecting an Entire Sheet To select an entire sheet, either click on an emptycell and use CTRLþA, or click on the small cell between column A and row 1 SeeFigure 2.1

Selecting a Section To select any continuous data or section, click on the first cell

of the section, then press Shift and click on the last cell of the section You can alsoreverse the process, click on the last cell, then press Shift and click on the first cell ofthis section to select, keeping the Shift key pressed down See Figure 2.2

Selection Shortcuts To select the current region in Excel, click on any cell in theregion and use CTRLþShiftþ* (star/asterisk) ( þA in Mac) See Figure 2.3.You can select an area from a currently highlighted cell or cells to the end of thedata in that region’s column Select the cell or cells and press CTRLþShiftþk (downarrow) ( þShiftþk for the Mac) See Figure 2.4

Using the same concept, you can select an area from a starting cell (or cells)

to the end of the data on that region’s row You select the cell(s) and clickCTRLþShiftþ- (right arrow) See Figure 2.5

FIGURE 2.1 The Select All Button

15

Any part of the region can be highlighted (selected) by first selecting a cell, a row,

or a column in a region and then by using CTRLþShiftþ’, CTRLþShiftþm, or asshown above CTRLþShiftþ-, and CTRLþShiftþk, to extend the selection to theend of that region in the direction we wish CTRLþShiftþ any arrow key (km-’)will enable selection from the starting cell(s) until the end of the data range in thedirection of the arrow Use instead of CTRL for the Mac

With larger spreadsheets, you may want to go back to the beginning of the sheet

or to the end of the data on the sheet To go back to cell A1, press CTRLþHome; toreach the last cell of the sheet use CTRLþEnd

Also, try CTRLþShiftþEnd to select the data from the current cell to the lastactive cell on the sheet To go to the first cell of a row, press the Home key

FIGURE 2.2 Selecting a Region without Dragging

FIGURE 2.3 Use CTRLþShiftþ* ( þA in Mac) for Selecting a Region