Tuesday, December 19, 2017

Microsoft Excel

A candid photo of Eaton Rapids Joe in casual attire.
Several of my "business associates" are not very good with computers.

One of them was unaware that there were formulas buried in the spreadsheet he was using and when it was not updating the way he expected he power-typed (with two fingers) the numbers he expected to show up.  Of course what happened is that he trashed the spreadsheet.

Microsoft Excel is an incredible tool.  One can start with simple models and add complexity.  Calculations on one sheet can be linked to other sheets, even other files.  Repetitive calculations can be automated in several different ways.

Once the model is built and validated, the user can perform sensitivity analysis.

What happens if the interest rate is 6%?  How about 4% or 2% or 0%?

What happens if the price of energy (fuel) goes from $2.50 a gallon to $3.50 a gallon?  What if it drops to $1.80?

Here is a good question:  How much do you have to 'discount' your product to make it competitive against older technologies that already have a user-base.  The 'discount' might actually be a higher base price for the dominant technology and a stiff rebate for a more competitive technology.

One of the challenges of a good model is to include the fixed costs that are external to and and cannot be separated from the immediate decision.
If the only cost of producing corn was the cost of the Nitrogen fertilizer than the most revenue for the money invested would be at the lowest level.

For example, a farmer might look at corn yield and think that the most bang-for-the-buck is at the lowest Nitrogen level.

On the other hand, suppose all of the other costs are 10X the cost of the lowest level of Nitrogen.  In that case the most revenue for the capital sunk in the venture is the highest level of fertilization.

Other costs matter!  A new technology might look expensive in a two-horse race that excludes productivity benefits.  Including inseparable, fixed costs gives  a truer picture as more volume is HUGE when there are other, large costs to amortize.

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