Excel Business Tools - Project Planning & Management

Empowering Business Decision-Making
with Excel Business Tools
A Practical User Guide

By Russell Penlington
Table of Contents
Introduction...................................................................................................................................... 6
Project Planning and Management..................................................................................................... 7

Defining the Project Resources .......................................................................................................... 7
Project Parameters ....................................................................................................................... 7
Human Resources ......................................................................................................................... 7
Email Address................................................................................................................................................ 7
Resource Productivity Factor ........................................................................................................................... 7
Cost/Hr......................................................................................................................................................... 7
Action........................................................................................................................................................... 7
Financial Resources....................................................................................................................... 7
Unit Type ...................................................................................................................................................... 7
No. Units ...................................................................................................................................................... 7
Unit Cost....................................................................................................................................................... 7
Action........................................................................................................................................................... 7
Contingency .................................................................................................................................................. 7
Capital Expenditure ........................................................................................................................................ 7
Action........................................................................................................................................................... 7
Control Panel ............................................................................................................................... 8
Defining and Entering Project Tasks.................................................................................................... 8
Adding New Tasks ........................................................................................................................ 8
Task Parameters ............................................................................................................................................ 8
Timing & Responsibility................................................................................................................................... 8
Resources ..................................................................................................................................................... 8
Editing and Updating Existing Tasks ................................................................................................ 9
Task Parameters ............................................................................................................................................ 9
Timing & Responsibility................................................................................................................................... 9
Resources ..................................................................................................................................................... 9
Progress ....................................................................................................................................................... 9
Running the Auto-Timing ............................................................................................................... 9
Creating the Gantt Schedule............................................................................................................ 10
Running and Analysing the Project Status Report ............................................................................... 10
Earned Value Analysis ................................................................................................................. 10
Budgeted Cost of Work Scheduled...................................................................................................................10
Budgeted Cost of Work Performed...................................................................................................................10
Actual Cost of Work Performed .......................................................................................................................11
Cost Variance ...............................................................................................................................................11
Schedule Variance.........................................................................................................................................11
Cost Performance Index.................................................................................................................................11
Schedule Performance Index ..........................................................................................................................11
Take Snapshot..............................................................................................................................................11
Cost Risk Analysis....................................................................................................................... 11
Budgeting Project Costs .................................................................................................................................11
Projected Project Costs ..................................................................................................................................11
Recovery Costs .............................................................................................................................................11
Project Timing............................................................................................................................ 11
Projected Duration ........................................................................................................................................11
Project Deadline............................................................................................................................................11
Predicted End Date........................................................................................................................................11
Overrun/ (Under run) ....................................................................................................................................11
Completion Analysis .................................................................................................................... 12
Participant Emailing and Workbook Generation................................................................................... 12
Creating Workbooks .................................................................................................................... 12
Emailing Participants ................................................................................................................... 12
Choose Participant(s) ....................................................................................................................................12
Email Options ...............................................................................................................................................12
Updating Progress Details from External Workbooks ........................................................................... 12
Multiple Regression Analysis and Forecasting.................................................................................. 13

Input Data .................................................................................................................................... 13
Availability................................................................................................................................. 13
Reliability .................................................................................................................................. 13
Relevance.................................................................................................................................. 13
Analysing the Output...................................................................................................................... 13
R-Squared ................................................................................................................................. 13
Empowering Decision-Making with Excel Business Tools – a Practical User Guide 2
© Excel Business Tools

F-statistic .................................................................................................................................. 13
Durbin-Watson statistic ............................................................................................................... 14
Multicolinearity........................................................................................................................... 14
Forecasting the Dependent Variable.................................................................................................. 14
Investment and Business Valuation ................................................................................................. 15

Setting the Assumptions ................................................................................................................. 15
The Investment Details................................................................................................................ 15
The Taxation and Amortisation ..................................................................................................... 15
The Capital and Cost of Capital ..................................................................................................... 15
The Risk-Free rate ........................................................................................................................................15
The Market Risk Premium ..............................................................................................................................15
The Equity Beta ............................................................................................................................................15
The Terminal Value ..................................................................................................................... 16
Infinite ........................................................................................................................................................16
Finite...........................................................................................................................................................16
The Comparable Investment Score................................................................................................ 16
Return on Invested Capital .............................................................................................................................16
The Net Present Value of cash flows ................................................................................................................16
The Cost/Benefit ratio....................................................................................................................................16
The Payback period .......................................................................................................................................16
The Free cash flow after 2 years .....................................................................................................................16
Financial Data Input ....................................................................................................................... 16
The Taxable Revenue .................................................................................................................. 16
The Non-Taxable Revenue ........................................................................................................... 16
The Operating Expenses .............................................................................................................. 17
The Investment Expenses ............................................................................................................ 17
The Existing Assets ..................................................................................................................... 17
Life ...........................................................................................................................................................17
Age ...........................................................................................................................................................17
Disposal.......................................................................................................................................................17
Current BV ...................................................................................................................................................17
Rate ...........................................................................................................................................................17
Method ........................................................................................................................................................17
The Capital Expenditure............................................................................................................... 17
Life ...........................................................................................................................................................18
Yr of Acq......................................................................................................................................................18
Acq Price......................................................................................................................................................18
Actg BV .......................................................................................................................................................18
Disposal.......................................................................................................................................................18
Rate ...........................................................................................................................................................18
Method ........................................................................................................................................................18
The Financial Analysis ................................................................................................................. 18
Analysing and Utilising the Results ................................................................................................... 18
The Accounting Impact ................................................................................................................ 18
The Cash Flow Analysis................................................................................................................ 18
The Economic Value Added .......................................................................................................... 19
The Comparable Investment Score................................................................................................ 19
The Additional Analysis................................................................................................................ 19
The Charts................................................................................................................................. 19
Real Option Valuation ...................................................................................................................... 20

Option Pricing Fundamentals ........................................................................................................... 20
A Call Option.............................................................................................................................. 20
A Put Option .............................................................................................................................. 20
Determinants of Option Value....................................................................................................... 20
The Option to Delay a Project .......................................................................................................... 21
Inputs....................................................................................................................................... 21
Name ..........................................................................................................................................................21
Present Value ...............................................................................................................................................21
Standard deviation ........................................................................................................................................21
Investment Needed .......................................................................................................................................21
Life of the project..........................................................................................................................................21
Cost of Delay................................................................................................................................................22
Results...................................................................................................................................... 22
The Option to Expand a Project........................................................................................................ 22

Inputs....................................................................................................................................... 22
Name ..........................................................................................................................................................22
Present Value ...............................................................................................................................................22
Investment Costs Needed ..............................................................................................................................23
Life of the expansion rights ............................................................................................................................23
Annual cost of waiting ...................................................................................................................................23
Results...................................................................................................................................... 23
The Option to Abandon a Project ...................................................................................................... 23
Inputs....................................................................................................................................... 24
Name ..........................................................................................................................................................24
Present Value ...............................................................................................................................................24
Expected Proceeds ........................................................................................................................................24
Time ...........................................................................................................................................................24
Cost of Abandonment ....................................................................................................................................24
Results...................................................................................................................................... 24
Binomial Option Pricing................................................................................................................... 25
Creating a Branch ....................................................................................................................... 25
Annual risk-free rate .....................................................................................................................................25
Annual dividend yield ....................................................................................................................................25
Period Length and Number of Periods ..............................................................................................................25
Allow early exercise? .....................................................................................................................................25
Estimated Asset Value Now ............................................................................................................................25
Estimated cost of Investment .........................................................................................................................25
Probability parameters...................................................................................................................................25
Use Volatility Assumptions .............................................................................................................................26
Deleting a Branch ....................................................................................................................... 26
Game Theory Analysis .................................................................................................................... 26
Inputs....................................................................................................................................... 26
Investment required......................................................................................................................................26
Annual Growth Rate ......................................................................................................................................26
Annual Standard Deviation .............................................................................................................................26
Inverse Demand Function ..............................................................................................................................27
Risk-free rate ...............................................................................................................................................27
cash flow in market .......................................................................................................................................27
Market Cash Flow..........................................................................................................................................27
Parameters ................................................................................................................................ 27
Cash Flow for Follower ...................................................................................................................................27
Follower’s Payoff Value ..................................................................................................................................27
Leader’s Payoff Value ....................................................................................................................................27
Simultaneous Payoff Value .............................................................................................................................27
Leading equals Following cash flow .................................................................................................................27
Sensitivity Table ......................................................................................................................... 27
Results Summary ....................................................................................................................... 27
Portfolio Optimisation ...................................................................................................................... 28

Setting up the Inputs ..................................................................................................................... 28
Risk free Rate...............................................................................................................................................28
Maintain Return Level ....................................................................................................................................28
Target Return ...............................................................................................................................................28
Min and Max Constraints ................................................................................................................................28
Current Units................................................................................................................................................28
Historic Price Data.........................................................................................................................................28
Historic Observation Periods ...........................................................................................................................28
Running the Optimisation Process .................................................................................................... 28
Analysing the Results ..................................................................................................................... 29
Applications to Business Portfolios .................................................................................................... 29
Capital Allocation ........................................................................................................................ 29
Investment and Divestment ......................................................................................................... 29
Portfolio Performance Monitoring .................................................................................................... 30

Model Overview ............................................................................................................................. 30
The Value sheet ......................................................................................................................... 30
Product Name...............................................................................................................................................30
First Invested ...............................................................................................................................................30
Capital Contribution ......................................................................................................................................30
Value at Start of Period..................................................................................................................................30

Current No. of Units ......................................................................................................................................30
Unit Price .....................................................................................................................................................30
Current Valuation..........................................................................................................................................30
Maturity Date ...............................................................................................................................................30
Gain/ (Loss) .................................................................................................................................................30
The Trans sheet ......................................................................................................................... 30
Product Name...............................................................................................................................................30
Description...................................................................................................................................................30
Type ...........................................................................................................................................................30
Date ...........................................................................................................................................................30
Units ...........................................................................................................................................................30
Unit Price .....................................................................................................................................................30
Net Amount..................................................................................................................................................30
Tax Amount .................................................................................................................................................30
Gross Amount...............................................................................................................................................30
The Perf sheet............................................................................................................................ 30
Product Name...............................................................................................................................................30
Value at Start of Period..................................................................................................................................30
Capital Added or Withdrawn ...........................................................................................................................30
Current Valuation..........................................................................................................................................30
Capital Invested Over Period ..........................................................................................................................30
Income Distributed Over Period ......................................................................................................................30
Net Return Over Period ..................................................................................................................................30
Annual Return Since Inception ........................................................................................................................30
Adding New Products...................................................................................................................... 31
Deleting Products .......................................................................................................................... 31
Entering Transactions ..................................................................................................................... 31
Executing Reports.......................................................................................................................... 31
Understanding Your Reports ............................................................................................................ 32
Net Return Over Period................................................................................................................ 32
Annual Return Since Inception ...................................................................................................... 32

Introduction
Excel Business Tools provides a range of Microsoft Excel templates for business analysis and financial decision-
making purposes. These templates are downloadable from Excel Business Tools. This paper offers a practical
guide for using these models to real world financial analysis and business decision-making endeavours.
Excel Business Tools models are designed with the flexibility to be able to be applied to scenarios with a wide
range of financial complexity. The tools can be employed in isolation or combined to provide complete analytical
solutions. For instance, project budgets from the Project management model and financial forecasts from the
Regression Forecasting model can be linked into the Investment Valuation model in order to evaluate viability
and sensitivities of a business proposal. Subsequently, alternative scenarios, such as the option to delay the
investment can be evaluated with the Real Option Valuation model, while the impact on the rest of the business
can be analysed using the Portfolio Optimisation model.
For the purposes of this paper, while the reader is assumed to have a basic level of financial theory knowledge,
effort has been made to make explanations accessible to practitioners from a wide range of business
disciplines.

Project Planning and Management
(Planning and managing the performance of your project from start to end)
The Project Planning and Management model is designed as a generic solution to plan and manage any
project. The ability to build the project’s budget as tasks are identified facilitates the processes of business
case proposal, valuation analysis, and securing the required funding. Project dynamics can be altered and
performance monitored with best practice Earned Value Analysis throughout the complete project lifecycle.
Defining the Project Resources
Key parameters and resources for the project can be entered into the ‘Resources’ sheet. To get started planning
and managing a new project, the Project Parameters and Human Resources sections on this sheet should first
be completed.
The Project Parameters section is used to specify parameter information for display purposes, emailing and
schedule calculation. These parameters are:
• The project’s name and manager's name are used for status reporting and email content.
• The project's start date, reporting date, and deadline are essential parameters for schedule timing
processes and the progress reporting of the project.
• The scheduling frequency is used to create the Gantt schedule and can be Days, Weeks or Months.
The Human Resources section allows the listing and management of participants available to undertake tasks
within the project. This plays an important role in the scheduling functionality of the model and must be
populated before tasks are defined and entered into the ‘Tasks’ sheet. The number of working hours per day is
specified here, as well the ability to manage the list of participants with their respective details and availability.
Clicking on the ‘Manage’ button presents a form for managing the list of human resources. An existing person
can be chosen to edit, or a new person can be specified to add. The required parameters for the participant are:
• Email Address. This is for emailing task lists to the participants able to be done from the Control Panel.
• Resource Productivity Factor. This specifies the amount of time per day that the participant is available to
work on the project and plays an important role in the automatic scheduling functionality of the model. If,
for example, the number of working hours per day is 8 and the participant can devote half of their time to
the project (4 hours per day), then the productivity factor should be 50%. It should be noted, however,
that values of greater than 100% can be used here. If the participant is responsible for managing 3 full
time people for a specific area of the project then a value of 300% can be entered here. The scheduling will
then utilise the resource accordingly. This enables the maximum amount of flexibility to delegate project
responsibilities at all levels. The productivity factor can also be automatically calculated by specifying the
number of hours available per day.
• Cost/Hr. The cost per hour is used to calculate operating expenditure for tasks based on time, and for
budgeting purposes. This can be left as zero, in the event that internal costs are not to be included in the
project analysis.
• Action. The ‘Update’ action updates existing participant’s details and adds new participants. The ‘Delete’
action removes an existing participant.
The Financial Resources section allows the listing and management of the project’s budget items. While the
budget may be managed directly here, it is also possible to manage the budget items while entering and
updating tasks in the ‘Tasks’ sheet. This enables the creation and development of the project’s budget as tasks
are defined and specified - often a more practical approach to project planning and budgeting. The currency
input denomination is also specified here for display purposes throughout the model.
Clicking on the ‘Manage’ button presents a form for managing the project budget. The parameters in the
Operating Costs area are:
• Unit Type. An existing unit type can be chosen to edit, or a new unit type can be specified to add. The pre-
existing ‘Hours’ unit type cannot be removed and is used for time based task budgeting.
• No. Units. This is the number of units to modify the budget with.
• Unit Cost. This is the cost of each unit for which the budget will be modified with.
• Action. Units can be added to, or deleted from the existing budget. Furthermore, a unit type can be
completely removed from the budget, providing that there are no tasks dependent of the unit type in the
‘Tasks’ sheet.
• Contingency. This is a percentage of the total cost which can be specified as risk cover in the event of
budget overruns.
The parameters in the Capital Costs area are:
• Capital Expenditure. The amount of capital expenditure for which the budget will be modified with.
• Action. Whether to Add/Delete the specified amount to/from the budget.

The Control Panel section allows the project manager to access the main functions of the model. While these
processes are also available in subsequent sheets, the Control Panel offers the manager one place to control
and monitor the performance of their project. This section offers the ability to:
• Pre-define input parameters including public holiday dates, emailing texts, project phase titles (up to 10),
and task titles within each phase. Note that the model is pre-populated with common, generic project
phases and respective task titles.
• Manage the project task list by adding and editing tasks directly in the Task sheet.
• Create the Gantt timing schedule in the Schedule sheet, based on the scheduling frequency specified.
• Run the project status report in the Status sheet as at the reporting date specified.
• Email project participants or create individual workbooks to communicate task lists or request for progress
reports.
• Recuperate task progress details from remote participant workbooks.
Defining and Entering Project Tasks
The ‘Tasks’ sheet enables the definition and management of all project tasks and required resources. New tasks
can be added using the ‘Add New Task’ button in the top left hand corner, and existing tasks can be modified,
updated or removed by selecting any cell in the task’s row and clicking the ‘Edit Selected Task’ button. Once
tasks have been defined, the ‘Auto-timing’ function can be executed, which optimizes the scheduling of Human
Resources according to availability.
Adding New Tasks:
New project tasks can be added by clicking the ‘Add New Task’ button. This displays a form with information
required for the new task in three sections. The first section is the Task Parameters and consists of:
• Project Phase. This is selected from a drop down box which is populated from the phases specified in the
‘Pre-Defined’ sheet. On selecting a phase the pre-defined task description list is populated from the
corresponding task titles in the ‘Pre-Defined’ sheet.
• Description. This can be specified or chosen from the pre-defined list based on the phase.
• Deliverables (to gauge completion). This section should be used to describe the specific deliverables and
milestones needed to be met in order to gauge that the task has been completed satisfactorily.
The second section is the Timing & Responsibility and consists of:
• Preceding Task for which completion is first required. This is used to create dependencies by specifying
that a preceding task must be completed before the new task can commence. This information is taken
into account within the Auto-timing function.
• Exp Duration. The expected duration of the task can be specified in the number of days and hours. This
input is converted into the total number of hours required by using the number of working hours per day
specified in the ‘Resources’ sheet.
• Productivity. This is the level of required productivity of the participant to work on the task represented as
the percentage of the number of working hours per day specified in the ‘Resources’ sheet.
• Person Responsible. This is the participant from the Human Resources that is responsible for completing the
task.
• Specify Start Date (optional). A specific start date can be specified where human and/or financial resource
constraints may exist. Specifying the start date here will override any preceding task or calculated timing
within the Auto-timing function.
The third and final section is the Resources required for the task which consists of:
• Unit Type. An existing unit type can be chosen, or a new unit type can be specified to add. If ‘Hours’ is
selected, the Unit Cost field is automatically filled in with the participants hourly rate.
• No. Units. This is the number of units required to complete the task.
• Unit Cost. This is the cost of each unit for the task.
• Add this cost to the Budget. This box should be checked to add the units, quantity and cost to the budget
under Financial Resources in the ‘Resources’ sheet. This way, the budget can be built by adding tasks.
budget overruns. This is enabled only if the cost is added to the budget.
• Capital Expenditure. The amount of capital expenditure required for the task.
• Add to the budget. Checking this box adds the specified capital expenditure to the budget.

Upon clicking the ‘OK’ button, a new row will be appended to the Task list with the details entered and, if
necessary, the budget will be modified accordingly in the ‘Resources’ sheet.
Editing and Updating Existing Tasks:
Existing project tasks can be edited by selecting any cell in the task’s row and clicking the ‘Edit Selected Task’
button. This displays a form with information populated for the task in four sections. The first section is the
Task Parameters and consists of:
• Project Phase. This is selected from a drop down box which is populated from the phases specified in the
‘Pre-Defined’ sheet.
• Description. This can be changed or chosen from the pre-defined list based on the phase.
• Deliverables (to gauge completion). The specific deliverables and milestones needed to be met in order to
gauge that the task has been completed can be altered here.
The second section is the Timing & Responsibility and consists of:
• Preceding Task for which completion is first required. This is used to create dependencies by specifying
that a preceding task must be completed before the new task can commence, and can be added, removed
or changed here.
• Exp Duration. The expected duration of the task (specified in the number of days and hours), can be
altered here.
• Productivity. This is the level of required productivity of the participant to work on the task represented as
the percentage of the number of working hours per day.
• Person Responsible. This is the participant from the Human Resources that is responsible for completing the
task and can be changed here.
• Timing. A specific start date can be specified where human and/or financial resource constraints may exist.
Specifying or changing the start date here will override any preceding task or calculated timing within the
Auto-timing function.
The third section is the Resources required for the task and consists of:
• Unit Type. An existing unit type can be chosen to change, or a new unit type can be specified to add. If
‘Hours’ is selected, the Unit Cost field is automatically filled in with the participants hourly rate.
• No. Units. This is the number of units required to complete the task.
• Unit Cost. This is the cost of each unit for the task.
• Modify the budget with the new cost. This box should be checked to modify the units, quantity and cost to
the budget under Financial Resources in the ‘Resources’ sheet. If the units were originally added, then they
will be modified, otherwise they will be added.
budget overruns. This is enabled only if the cost is to be modified in the budget.
• Capital Expenditure. The amount of capital expenditure required for the task can be changed here.
• Modify the budget. Checking this box adds the specified capital expenditure to the budget.
The fourth and final section is for recording the task’s Progress and consists of:
• Units Completed. This is the number of units (as specified in the Resources section) that have been
completed to date.
• Capital Spent. This represents the capital expenditure attributable to the task spent to date.
• Task Completed. This box should be checked if the task has been completed. This will display another
input box for the completion date and time to be entered.
After selecting whether to Update or Delete the task, clicking ‘OK’ button, will make the necessary changed to
the selected task row and update the budgeting information if necessary.
Running the Auto-Timing:
Once tasks have been added, the Auto-timing function can be run to automatically to calculate the optimal start
and end dates for each task by evaluating the available human resources and respective productivity factors.
The Auto-timing process can be run at any time as the task list is modified during the project life cycle;
however the Gantt Schedule and Project Status Report will have be rerun in order to capture the changes
made to the project’s timing.
Essentially the Auto-Timing works by evaluating each task individually. The first tasks to be allocated time are
those with specified start dates. This ensures that tasks identified with such resource constraints are allocated
with time resources before those without constraints.

Once these tasks have been allocated time, tasks are allocated in order of Phase with dependent task start
dates constrained to the end dates of their predecessors.
Tasks that have been completed with a specified completion date are not including the process.
As each task is analysed, the participant’s available productivity is examined, taking into account of productivity
which has already been allocated to previously analysed tasks.
The Auto-Timing can be run by clicking ‘Run Auto-Timing’ button. Auto-timing can also be cleared by clicking
the ‘Clear Auto-Timing’ button; however previous auto-timing dates are cleared each time the process is run.
Creating the Gantt Schedule
When the Auto-Timing process has been run, the Project Gantt Schedule can be recreated to capture the
changes made in the project task timing. The Gantt Schedule schedules each task by phase according to the
dates along the top row for which the frequency is specified in the ‘Resources’ sheet.
Each task’s timeline is colour coded according to the Phase colours specified in the ‘Pre-Defined’ sheet. Tasks
that have been completed are coloured in dark grey. Each coloured cell in the task timeline is commented with
the task details and participant’s productivity schedule for the cells time period.
Underneath the Task timelines are totals of Full-time man hours (scheduled and completed), and Costs
(operating, capital and total) for the time period relating to each column. If the selected scheduling frequency
specified in the ‘Resources’ sheet is Days, then columns for weekends and public holidays are blocked out of the
scheduling.
If the project deadline (also specified in the ‘Resources’ sheet) occurs before the expected end date of the final
task, then the project deadline is marked and labelled on the schedule in red.
Running and Analysing the Project Status Report
The Project Status Report can be run at any time to gain an insight into the current progress status of the
project and identify risks in order to take necessary corrective action. The date for which the project status
report is required is specified in the ‘Resources’ sheet. The project status analysis is broken into four main
areas: Earned Value Analysis, Risk Analysis, Project Timing, and Completion Analysis.
Earned Value Analysis:
Earned value analysis compares the planned resources to the projects time-based schedules and costs, to
constitute a cost and schedule measurement baseline. The three main objectives of earned value analysis are:
• To establish effective internal cost and schedule management control systems.
• To monitor the project in real time and anticipate possible slippage.
• To enable the manager to get timely data for determining unit type contract status.
Earned value parameters are calculated for each unit type and capital costs in order to calculate a Cost
Performance Index and Schedule Performance Index for each component and for the project as a whole.
When running the Status Report, use is made of both budgeted and actual unit costs for the earned value
analysis. If zero unit costs are detected, an option to base earned value on Hours rather than Value is given.
This enables the earned value analysis to still be run on projects for which costs are not quantified (e.g. internal
labour costs).
Three basic project performance measurement variables are required to perform the earned value analysis.
These are:
• BCWS – Budgeted Cost of Work Scheduled. This is the portion of the budget that corresponds to the work
that has been scheduled to be done so far for the unit type. This is calculated by multiplying the number of
units scheduled (as defined by the auto-timing function) by the budgeted unit cost.
• BCWP – Budgeted Cost of Work Performed. This is the portion of the budget that corresponds to the work
that has actually been performed for the unit type. This is calculated by multiplying the number of units
completed by the budgeted unit cost. The BCWP can be considered as the worth of the work completed and

is often referred to as Earned Value (EV). Conceptually BCWP is the BCWS multiplied by the percent
complete.
• ACWP – Actual Cost of Work Performed. This is the amount of money that has been expended so far in
performing the work for this unit type. This is calculated by multiplying the number of units completed by
the actual unit cost (specified in the ‘Tasks’ sheet).
From these three performance measures, two variances can be calculated:

• Cost Variance: BCWP – ACWP. This represents the difference between what has actually been spent and
what should have been spent. A negative cost variance indicates that costs are over budget for the work
that has been performed.
• Schedule Variance: BCWP – BCWS. This represents the difference between the project value of the project
that has been earned and the project value that was scheduled to be earned. A negative schedule variance
indicates that amount of project value that has fallen behind the schedule – i.e. that amount that should
have been earned but has not.
The three performance measurements are also used to calculate the Cost Performance and Schedule
Performance Indices that provide a more standardised analysis of project cost and schedule performance.
• CPI – Cost Performance Index: BCWP/ACWP. This represents the value earned by each dollar (or currency
unit) spent. It gives an indication of whether is project is running over or under the budgeted costs. A CPI
of less than 100% indicates that the project is over budget as the value of work produced is less than the
amount spent.
• SPI – Schedule Performance Index: BCWP/BCWS. This represents the amount of work that is completed
relative to work that was scheduled to be completed. It gives an indication of project performance relative
to the planned schedule. An SPI of less than 100% indicates that the project is running behind schedule as
the number of units completed is less than the number of units that were scheduled to be completed.
Period “snapshots” of both the CPI and SPI for the project can be taken at the bottom section of the Status
Report. The Historical Project Performance chart plots the CPI and SPI at the periodic snapshot intervals, to
give a clear view on the trend of the project performance since the start date. This trend can be used to view
the reaction of the project to actions taken and the plan can be revised in response to the direction and
intensity of the trends.
Clicking on the ‘Take Snapshot’ button will append the CPI and SPI values to the Snapshot History table as at
the status report date, and update the chart accordingly. Snapshots can be removed by selecting any cell for
the snapshot and clicking the ‘Remove Selected Snapshot’ button.
Cost Risk Analysis:
The Cost Risk Analysis section summarises the project’s total operating and capital costs with projection and
recovery calculations derived from the performance indexes. The analysis consists of three calculations:
• The Budgeted Project Costs, and Budgeted Project Costs with Risk Contingency are extracted directly from
the project’s budgeting data in the ‘Resources’ sheet.
• The Projected Project Costs are calculated by dividing the Budgeting Project Costs (without contingency) by
the CPI index. This represents the expected cost of the overall project if cost overrun or under run
continues as it has so far. If this is higher than the Budgeted Project Costs, it should be compared to the
Budgeted Project Costs with Risk Contingency to determine whether there is enough contingency to cover
the expected overrun.
• Recovery Costs represent the costs that will need to be incurred to complete the project in the originally
specified time by added additional resources. This is calculated by dividing the Budgeting Project Costs
(without contingency) by the SPI multiplied by the CPI, and then subtracting the Budgeting Project Costs.
Project Timing:
The Project Timing section calculates the expected duration of the project and compares this with the planned
end date. The key information displayed here are:
• The Projected Duration. This is calculated by dividing the planned duration by the SPI and represents the
total number of days required to complete the project, assuming schedule performance is held constant.
• The Project Deadline. This is copied directly from the project deadline date in the ‘Resources’ sheet.
• The Predicted End Date. This is calculated by adding the Projected Duration to the original start date
specified in the ‘Resources’ sheet.
• Overrun/ (Under run). This represents the number of days after the deadline required for the project to be
completed. This is calculated by the number of days between the projected end date and the project
deadline.

Completion Analysis:
The completion analysis section displays the number of units budgeted, scheduled, and completed for each unit
type. The number of units completed is then compared to both the budgeted number of units from the
‘Resources’ sheet, and the total scheduled number of units calculated by the ‘Auto-Timing’ function in the
‘Tasks’ sheet. These comparisons are used to determine number of Remaining Units to be completed and
Percent Complete against both the budget and schedule.
This analysis can be used to give an overall view of project completion and isolate the unit types which may be
holding back progress. It also allows the identification of any discrepancies that might exist between budgeted
and scheduled units required to complete the project.
Participant Emailing and Workbook Generation
Participants can have individual workbooks created for them or be emailed by clicking the ‘Create Workbooks &
Email’ button in the Control Panel of the ‘Resources’ sheet.
Creating Workbooks:
Creation of individual participant workbooks provides the ability to recuperate task progress information
automatically once participants have entered task progress information. The workbooks can be either emailed
as attachments or saved onto a shared network directory. The only parameters required here are the
participants from the drop down list. Either all participants can be selected or one individual participant can be
selected here.
On execution, a dialogue box is displayed to browse to the folder for which the files will be saved to. The
program then creates individual workbooks for each participant containing a task list and timing schedule for
the tasks related only to that participant. The file names used are the participant names and existing files with
the same name are automatically overwritten.
Emailing Participants:
Note: The emailing function has been designed to able to be used independently of the emailing software (as
opposed to being restricted to Microsoft Outlook), by using a Windows API call. For this reason, the results of
the email creation may vary depending on user configurations. This option can be used for participants, who do
not have Excel installed, as an alternative to sending attached workbooks created in the previous option.
It is important that the emailing software is open before executing this function. The parameters for sending
text based e-mails required are:
• Choose Participant(s). Either all participants can be selected or one individual participant can be selected
here.
• Email Options. One of two types of email can be created: to distribute newly created task lists, or to
request updates on progress reports. The body text for both of these email types can be modified in the
‘Pre-Defined’ sheet. In the first instance that this function is used, it is highly recommended that the
Preview box remains checked before sending the emails.
Updating Progress Details from External Workbooks
When participant workbooks are created by the process in the previous section, the number of units completed,
capital expenditure spent, and completion date columns in the ‘Task List’ sheet are highlighted in blue.
Participants can, therefore, be advised to complete these areas in order to update the progress of their tasks.
Participant workbooks can then be emailed back and saved to a directory (or edited directly on a network
directory) to be read by this process for automatically updating the task completion details in the ‘Tasks’ sheet.
On selecting the participants and clicking OK, a dialogue box will appear to select the directory to where the
participant file(s) are. This process assumes that the file names reflect the participant names as produced in
the file creation process. Upon reading the data for each file, each task is analysed and checked against the
participant name in the ‘Tasks’ sheet. This ensures that tasks that have been modified with a new participant
are not overwritten with the old participant’s progress data.

Multiple Regression Analysis and Forecasting
(Producing statistically sound value driver identification and forecasting)
The Multiple Regression Analysis and Forecasting model provides a solid basis for identifying value drivers
and forecasting data for input to valuation and analytical models. While it utilises a range of commonly
employed statistical measures to test the validity of the analysis, results are summarized in layman’s terms for
ease of use. Once relationships have been identified, forecasting can be accomplished based on a range of pre-
defined methodologies.
Input Data
Arriving at suitable input data for the Regression Forecasting model can be somewhat of an iterative process.
Depending on the strength of the resulting output, independent variables can eliminated, replaced, or added
until a statistically sound and satisfactory predictive regression equation eventuates. In selecting suitable
independent variables, several factors should be taken into consideration:
• Availability. Clearly, the independent data corresponding to the same observation periods as the dependent
must be available to run the model. However, the availability of forecast data should also be considered.
This is because the forecast data can be utilised in the regression equation to forecast the dependent
variable. While the model allows automatic forecasting of independent variable data based on underlying
trend lines, already calculated forecast data is likely to be based on stronger underlying analysis. Such
forecasts might be sourced from in-house business plans or third party data providers.
• Reliability. Input data should be acquired from a reliable source. This is particularly important if the data is
estimated. If it is anticipated that forecasts of the independent data will be utilized to forecast the
dependent variable, investigation should be made into the soundness of formulae and estimation processes.
• Relevance. Independent data should have a relevant relationship to the dependent variable. While
seemingly unrelated variables may possess correlations when testing for suitable independent ‘value driver’
data, care should be given that the relationship is not merely coincidental. Thought should be made that
the independent variable data has at least a logical cause to influence the dependent variable.
Data should be input into the ‘Input’ sheet. The Dependent variable data and title should be entered into
column A, and the Independent variables’ data and titles should be entered into columns B to K. The number
of Independent variables is limited 10. The number of observations is unlimited. While cells are formatted for
100 observations, the formatting can be copied down into subsequent rows in order to accommodate a higher
number of observations.
Analysing the Output
The Output of the Multiple Regression Forecasting model essentially provides the regression equation to predict
the dependent variable (given the independent variable values) with some key statistical tests to evaluate its
proficiency. Information on each of the measures is available by clicking on the corresponding question mark
icons.
R-Squared: The primary statistic is the R-Squared, which essentially returns the percentage change in
dependent variable that can be explained by changes in the independent variables. The idea is that new
combinations of independent variables can be used to maximize this percentage. The chart at the bottom left
visualizes the R-Squared by plotting the actual versus predicted values of the dependent variable. If the dots
are closer to the line, the R-squared is higher and a stronger relationship exists. If the dots are widely spread,
the inverse is true.
F-statistic: The next key statistic is whether the analysis is significant at a 95% level of confidence. The F-
statistic must be greater than the critical F-statistic to the right. This depends on the number of observations
used and over relationship between the variables. Essentially this test must be met to even consider using the
analysis as a predictor for the dependent variable.
Below the equation parameters, are the actual components of the multiple regression equation. To the right of
this, analysis is made to the individual independent variables to help ascertain and eliminate any problem
variables. Individual R-squared statistics are returned so that independent variables with low R-Squares may be
removed and potentially replaced by stronger value drivers in the analysis. This becomes somewhat of an
iterative process to strengthen the overall analysis.

Durbin-Watson statistic: The Durbin-Watson statistic, at the top right of the Output sheet, tests the overall
regression equation for the presence of Autocorrelation. Essentially, this tests whether a significant part of the
change in the dependent variable is actually a product of time rather than the independent variables (i.e. the
fact that simply an observation period may have effects on future observations). Comparison against critical
ranges of the Durbin-Watson statistic highlight the presence of positive or negative autocorrelation however the
statistic should be close to 2 for minimal autocorrelation. If the overall equation possesses autocorrelation,
then the analysis of this statistic for each independent variable against the dependent is displayed below can be
used to isolate the source.
Multicolinearity: Sometimes two or more independent variables may have a similar relationship to the
dependent and be closely related to each other. This is known as Multicolinearity and essentially biases the
analysis to have a stronger predictive outcome. In such a case it is usually appropriate to eliminate the
independent variable that is more difficult to predict in the forecast.
To detect multicolinearity, the model runs an R-Squared statistic for each independent variable against all other
independent variables. Where a strong relationship is detected, independent variables responsible can be
identified in the matrix to right.
Forecasting the Dependent Variable
The Output is essentially an iterative tool for identifying the "value drivers" of the dependent variable. When
the output shows a satisfying relationship and predictive equation, a robust forecast can be made by using the
box at the bottom right of the Output sheet. Each independent variable can be either independently forecast
using in-built trend line methods (linear, exponential, or polynomial of 2nd and 3rd order) or left blank so that
existing forecast data can be input to predict the dependent variable. Such forecasts of independent variables
may be from third party or business plan data. Either way, the ‘Forecast’ sheet automatically inputs the
regression equation to produce the forecasted dependent variable data.

Investment and Business Valuation
(Evaluating a wide range of investment and business case proposals)
The Investment and Business Valuation model is designed with the flexibility to be able to value a wide
range of investment and business case scenarios. While it is based on the traditional discounted cash flow
method of valuation, it also provides ability to evaluate Economic Value Added (EVA) valuation, accounting
impact, and a range of other evaluation parameters.
Setting the Assumptions
The ‘Assumptions’ sheet lists the key assumptions necessary for the model to evaluate the particular
investment proposal. Default values have been input here with help icons to detail the purpose and functionality
of each input. Input cells on this sheet, and the rest of the workbook, are identified with a light blue colour.
The Investment Details section allows the identification of a New or Existing investment. Choosing the New
option hides the existing investment name input and will require only new investment input data to be entered
in the subsequent sheets. Alternatively, the Existing option can be used requiring both new and existing
investment names and two sets of input data to be entered in subsequent sheets. This option is useful under
several different analytical scenarios:
• To evaluate the difference between the current business operating model and a modified business model
incorporating a new strategy, process, supply chain etc.
• To evaluate the difference between two new investment proposals. A common example would be to
evaluate whether to lease or buy a new asset.
• To evaluate the impact of a change in assumptions to an investment proposal already evaluated and
undertaken. Here, the new assumptions can be evaluated against the old ones.
The first year of valuation and denomination of input values, also entered in this section, are used for display
purposes in subsequent sheets.
The Taxation and Amortisation section is used for corresponding calculations in the model. The company or
business tax rate should be the legal rate, as opposed to the calculated rate actually paid by the company.
Checking the box to carry forward tax credits on operational losses simply nets negative tax expenses on losses
against taxable profit. The goodwill amortisation period represents the period over which the company writes
off goodwill arising from assets purchased for more than their book value.
The Capital and Cost of Capital section is used to calculate initial discount rates and capital employed for EVA
analysis. The cost and levels of debt and equity are used to calculate the weighted average cost of capital for
the analysis. A calculation tool is provided to assist in the calculation of the cost of equity under the Capital
Asset Pricing Model. Required inputs for this include:
• The Risk-Free rate. The equivalent 1-year government bond rate can be used here.
• The Market Risk Premium. This represents the return that investors expect over and above the risk-free
rate to compensate for the increased risk of holding equity. Essentially the risk-free rate plus the market
risk premium represents the expected return from the equity market. This information can be obtained
from historical market return data, or from estimations made by third party data and analysis providers.
• The Equity Beta. This represents the ratio of company or industry specific risk compared to the overall
market risk. Essentially, an equity beta under 1 indicates less risk than the market and vice-versa. It is
calculated by the company or industry price volatility correlation to the market and can be obtained from
historical equity price data or third party data providers.
Cash flows can be discounted with the cost of capital either at the end of each year, or mid year where the
beginning and end cash flow levels are averaged. Mid year discounting has the benefit of averaging out large
cash flow fluctuations at the beginning or end of any year.
The capital charge for EVA can be calculated with capital employed taken at either the beginning of the year or
the average of the beginning and end year levels. Calculating the capital charge with capital as at the beginning
of the year is more appropriate for EVA remuneration systems as this way management cannot simply reduce
the capital charge by reducing the amount of capital employed throughout the year.
The final option in this section is whether to include existing asset capital in the EVA capital charge. This box
should be checked when analysing the difference between two different asset structures. However, when this
option is chosen, it should be noted that it creates a discrepancy between cash flow where there is no impact of
existing assets (no purchases or sale of assets) and EVA where the asset incurs an ongoing capital charge.

The Terminal Value section allows customisation to the values and calculation method of the investments
terminal value after the 5-year explicit forecasting period. If it is decided to include a terminal value in the
overall evaluation, the calculation can be made using one of two alternative methods:
• Infinite. This is the traditional perpetuity calculation utilising the cost of capital and required growth rate to
infinity. The growth rate can be entered in the cell provided or left blank for which the cash flow growth
rate from year 4 to 5 will be utilised.
• Finite. This unique alternative can be used when it is unreasonable to expect cash flows to grow at a
prescribed rate to infinity. This is especially useful for new economy or highly competitive environments
where product life cycles are short. This method requires a growth rate after year 5, like the Infinite
method, and also the year that the investment reaches maturity (0 cash flow growth rate) and the year
that the investment terminates (0 net cash flow). The calculation uses parabolic functions to smooth cash
flow from year 6 to maturity and down to the terminal date.
Both methods allow the input of ongoing annual capital expenditure, which is deducted from the cash flow for
each year of the terminal value calculation.
The Comparable Investment Score section allows for the unique setting of scoring parameters so that
competing, subsequent, or previous investment proposals can be quickly compared and prioritised. Optimal
value and weighting parameters should be set at the corporate level based on the organisations specific
environment, strategy and priorities. Parameters should then be held constant so that investment and business
case proposals can be evaluated quickly and efficiently on an even playing field.
The parameters included in the score are:
• Return on Invested Capital, as a percentage over and above the WACC.
• The Net Present Value of cash flows, as an amount in input denominations.
• The Cost/Benefit ratio, as a ratio of 5-year net cash flows generated to cash invested up front.
• The Payback period, as the number of years needed cumulative cash flow to breakeven.
• The Free cash flow after 2 years, as an amount in input denominations.
Company wide optimal values can be entered into the input cells next to each parameter. Overall score
weightings can be altered to suit the current operating environment using the slide bars. Alternatively, one of
two preset weighting systems can be selected from the dropdown box. The Capital Constrained weighting
option is useful for companies with scarce resources wishing to maximise the percentage return on Invested
Capital. Conversely, the No Capital Constraint option is useful ‘cash rich’ companies without capital constraints
wishing to maximise the nominal return amounts or NPV of cash flows.
Financial Data Input
After setting the assumptions for the valuation, clicking the ‘Next’ button in the Assumptions sheet will take you
either to the ‘Before’ sheet, if you have chosen the ‘existing investment’ option, or directly to the ‘After’ sheet
for new investment valuations. The ‘Before’ and ‘After’ sheets are identical requiring the same input, and the
‘Results’ sheet simply calculates the difference between the two. The following information, therefore applies to
both sheets. Like the ‘Assumptions’ sheet, all input cells are identified with a light blue colour.
The Taxable Revenue section allows for the input of revenue items that are deemed assessable for taxation
purposes. While two lines of input are immediately available, more can be added by clicking the Plus icon to the
left. In a similar fashion, lines can be removed by clicking the Minus icon whereby any input data in the bottom
input line with be deleted. This functionality also applies to the Non-Taxable Revenue and Operating Expenses
sections below.
Input data for taxable revenue can be linked from supplementary spreadsheets and may typically include sales
revenue calculated from forecast sales volume and price data. The Regression Forecasting model serves as an
excellent tool for producing such forecast data and can be downloaded directly using the link provided to the
right.
It should be noted that, unlike the following sections, input for taxable revenue is only available in years 1 to 5,
and not in year 0. This is on the basis that costs may be incurred up-front (in year 0), but resulting revenues
will not received until the first year of the forecast period.
The Non-Taxable Revenue section should be used to input revenues that are not assessable for tax purposes,
and expenses that are non-deductible for tax purposes (entered as negatives for positive expenses). A further
input for this section is any change in Working Capital that may be applicable to the analysis. Working capital is
the difference between Current Assets and Current Liabilities and often arises from differences in the cash flow

timing of payments to trade creditors for raw materials and inventories (liabilities) and customer settling of
accounts receivable (assets). This information is typically obtained by using historical average days for
settlement of creditor accounts payable and accounts receivable applied to forecast raw material purchase and
forecast sales respectively. The correct calculation for the change in working capital in year t is:
- ([current assets(t)-current liabilities(t)] – [current assets(t-1)-current liabilities(t-1)])
The Operating Expenses section should be used for tax deductible expenses required for the ongoing operation
of the business and resulting revenue generation. Typically, operating expenses include costs such as raw
materials, transport, personnel, marketing, office supplies, legal and administration costs. Specifically,
operating expenses entered here should not be investments for future revenue generation or cost savings as
outlined in the Investment Expenses section below. While including such ‘investment’ expenses here will not
have any effect on cash flow, it will effect the calculation of Economic Value Added by excluding them from the
capital employed.
The Investment Expenses section is used for inputting tax deductible costs that essentially represent
investments in future revenue generation or cost savings. Typically, such costs include restructuring and
redundancy costs and enhancements to existing assets. In order to determine whether an expense is an
‘investment’ expense one should ask, “Is this cost required for the current ongoing operation of the business?”
(It is an operation expense), or “Will the benefits of making this cost not be realised until subsequent years?”
(It is an investment expense).
These costs are treated differently to operating expenses under the Economic Value Added calculation due to
their quasi capital type nature. Instead of being expensed when incurred, in the EVA calculation they are
capitalised and amortised over the period in which the benefits from the investment are expected to be
realised. Up to three different types of Investment Expense can be entered here with different amortisation
periods ranging between 1 and 10 years.
The Existing Assets section allows for the input of any existing assets that need to be taken into account for the
valuation. This is useful for valuing current versus proposed asset structures or lease versus ownership
scenarios. Up to five existing assets can be entered here with input parameters provided across the columns.
The first category of parameters deals with asset life and disposal:
• Life (Yrs). The original useful life of the asset until disposal. This is used to calculate the disposal date and
book values at disposal.
• Age (Yrs). The current age of the asset since purchase date, in years or part thereof.
• Disposal. The disposal value of the asset at the end of its useful life, as a percentage of the original
purchase date. This is used to calculate cash flow and any accounting or tax gain or loss on disposal.
It should be noted that any forecast sale of assets can be input here by manipulating the Life to equal the
current Age plus remaining time to sale, and the Disposal value as a percentage of the expected sale price to
original purchase price.
The next category of parameters deals with accounting depreciation conventions:

• Current BV. The current accounting book value of the asset (original purchase price less accumulated
accounting depreciation).
• Rate. The accounting depreciation rate for the asset, as a percentage.
• Method. The accounting depreciation method for the asset. This can be either Straight-Line or Diminishing
value (otherwise known as Declining Balance) and can be selected from the dropdown box provided in the
cell.
The next category of parameters deals with tax depreciation conventions:

• Current BV. The current tax book value of the asset (original purchase price less accumulated tax
depreciation).
• Rate. The tax depreciation rate for the asset, as a percentage.
• Method. The tax depreciation method for the asset. This can be either Straight-Line or Diminishing value
(otherwise known as Declining Balance).
The final parameter is for any unamortised portion of goodwill for the asset. Goodwill arises when an asset is
purchased for more than its book value. The difference is amortised over a specified period.
The Capital Expenditure section allows for input of expected purchases of new assets. It should be noted that
any capital commitments (from asset purchases or capitalised investment expenses) remaining after year 5 are
taken into account to properly capture the impact of the capital investment activities undertaken during the
explicit forecast period. This is accomplished by calculating the present value of such remaining commitments

as at the end of year 5. Up to five new asset purchases can be entered here with input parameters provided
across the columns.
The first category of parameters deals with the asset purchase, life and disposal:
• Life (Yrs). The useful life of the new asset until disposal. This is used to calculate the disposal date and
book values at disposal.
• Yr of Acq. The year that the new asset is expected to be purchased. The calculation assumes that the
asset is purchased at the beginning of this year.
• Acq Price. The expected purchase price of the new asset.
• Actg BV. The accounting book value of the new asset at the acquisition date. If lower than the acquisition
price, this is used to calculate goodwill.
• Disposal. The disposal value of the asset at the end of its useful life, as a percentage of the original
purchase date. This is used to calculate cash flow and any accounting or tax gain or loss on disposal.
It should be noted that, like the Existing Asset section, any forecast sale of new assets can be input here by
manipulating the Life to equal the time to sale, and the Disposal value as a percentage of the expected sale
price to original purchase price.
The next two categories of parameters deal with accounting and tax depreciation conventions:
• Rate. The accounting or tax depreciation rate for the asset, as a percentage.
• Method. The accounting or tax depreciation method for the asset. This can be either Straight-Line or
Diminishing value (otherwise known as Declining Balance) and can be selected from the dropdown box
provided in the cell.
The final parameter specifies the expected mix of funding for the purchase of the new asset. This is input as a
percentage of Equity to total (debt plus equity) funding for the purchase. The default value here is the equity
to total capital ration as specified in the ‘Assumptions’ sheet. This is used for calculating the ongoing capital
and cost of capital.
The Financial Analysis section summarises the financial impact of the input data, in three formats:
• The Accounting Impact displays the impact on the accounting statement of financial performance.
• The Cash Flow Analysis displays the annual net cash flows and discounts them at the weighted average cost
of capital to calculate the net present value.
• The Economic Value Added displays the economic profit less a capital charge for each year by making
adjustments for changes in asset structure and 'investment expenses'. Annual EVA is then discounted at the
weighted average cost of capital to calculate the present value.
The Cash Flow Analysis and Economic Value Added include an additional calculation for the PV of capital
commitments after 5 years. This is to ensure that any remaining impacts of capital structure changes (made
during the forecast period) are taken into account in the present value calculation. Detailed calculations for
components of these analyses can be viewed by checking the View boxes below to unhide the calculation
categories.
Analysing and Utilising the Results
The ‘Results’ sheet outputs the valuation parameters of the analysis into several categories. The complete
Results sheet can be export to a new book using the button provided so that sections can be copied and
embedded into other media such as business case proposals.
The Accounting Impact displays the main components and calculation of Net Profit. This information is the least
accurate in terms of economic reality, but is useful to determine the impact of the investment on accounting
results. Such analysis is useful evaluating possible credit rating and/or shareholder reporting and disclosure
implications.
The Cash Flow Analysis displays the main components of cash flow and calculates the Net Present Value (NPV)
of cash flows at the discount rate. The 5-yr NPV of Cash Flow includes the PV of remaining capital
commitments after year 5, as displayed to the right. The terminal value is also calculated here (if applicable) to
calculate the total NPV of cash flows and therefore the overall Valuation of the investment represented by the
expected future cash flows. The cash flow analysis is also useful for evaluating the timing impact of cash
received and required by the business, and its corresponding impact on the cash flow statement.

The Economic Value Added shows main components of the EVA calculation and the NPV of EVA at the discount
rate. Like the cash flow analysis, the 5-yr present value (PV) of EVA for the 5 years includes the remaining
capital commitments after year 5, as displayed to the right. The EVA terminal value is also calculated here (if
applicable) to calculate the Total PV of EVA. If an Infinite terminal value is employed, the Total PV of EVA will
be equal to the total PV of cash flows. This is because EVA and Cash Flow are equal to infinity, with the only
difference being the timing as capitalised items are spread out over future years under EVA. The Economic
Value Added analysis is the most accurate in terms of economic reality and is useful for measuring shareholder
value creation and linking management incentives to shareholder interests.
The Comparable Investment Score section utilises the parameters in the ‘Assumptions’ sheet to apply a
weighted average score to the investment. Each component of the score is displayed here to sum to the total
Comparable Investment Score. This can be used to benchmark the overall investments attributes against
competing, alternative or future proposals. While the overall score provides a quick solution to determine the
viability of the proposal, the components of the score should also be analysed to understand its strengths and
weaknesses.
The Additional Analysis section provides some further useful analytics for the investment. Implicit annual
growth rates are calculated using the 5 year input data for total revenues, total expenses, operating cash flow,
net cash flow, economic profit, and EVA. The change in the business’s gearing ratio (total debt to total capital),
from year 0 to year 5 is also calculated and displayed here. Finally, The Modified Internal Rate of Return
(MIRR) is displayed. The MIRR represents the hypothetical investment return if the NPV of cash flow is zero,
taking into account both the cost of the investment and the interest received on reinvestment of cash.
The Charts section displays graphical representations of both Net Cash Flow and EVA. Charts provided for each
include annual and cumulative for the 5-year forecast, and annual with the terminal value displayed until year
100.

Real Option Valuation
(Valuing the strategic options embedded in your proposal)
While the traditional discounted cash flow analysis produced by the Investment and Business Valuation model is
a worthwhile exercise, it fails to consider any potential strategic options that may be associated with the
proposal. The Real Option Valuation model provides the means to extend the traditional analysis by
quantifying any such options that may be apparent. The model encompasses a suite of option pricing tools to
quantify the embedded strategic value for a range of investment and decision making scenarios. Such tools
include:
• Modified versions of the Black-Scholes Option pricing model to value:

1. The option to Delay a project.
2. The option to Expand a project.
3. The option to Abandon a project.
• Binomial Option pricing model to value options on options and compare scenarios.
• Game Theory model competitive dynamics for entering a market.
The Menu sheet of the Real Option Valuation model provides a short description of each of these tools so that
the most appropriate model can be quickly chosen for valuation.
Option Pricing Fundamentals
An option represents the right to buy (call) or sell (put) a specific quantity of an asset at a fixed price (exercise
price) at or before a specified date in the future. This right is not an obligation, therefore the holder can choose
not to exercise the purchase or sale and allow the option to expire.
A Call Option gives the holder the right to buy an asset at a specified exercise price at any time before the
specified expiry date, for which the holder pays a price for. At the expiry date, if the asset value is less than
the exercise price, the asset is not purchased and the option expires worthless. Conversely, if the asset value
exceeds the exercise price, the asset is purchased at the exercise price and difference represents the gross
profit on the investment. The net profit is the difference between the gross profit and the price paid for the
call. The options to Delay or Expand a business case or project are both variations of call options.
A Put Option gives the holder the right to sell an asset at a specified exercise price at any time before the
specified expiry date, for which the holder pays a price for. At the expiry date, if the asset value is greater than
the exercise price, the asset is not sold and the option expires worthless. Conversely, if the asset value is less
than the exercise price, the asset is sold at the exercise price and difference represents the gross profit on the
option. The net profit is the difference between the gross profit and the price paid for the put. The option to
Abandon a business case or project is a variation of a put option.
The calculation of option value (call or put price) is accomplished in the model by employing modified versions
of the Black-Scholes model. It is not the purpose of this paper to detail the mathematical derivation of this
calculation; however in broad terms the model employs the use of a ‘replicating’ portfolio consisting of the
underlying asset and risk-free rate to determine the options value. Modifications are made to the model in
order to account for:
• Dividends (or cash flows to and from the asset),
• Early exercise of the option before the expiry date, and
• The impact of exercise on the value of the underlying asset.
Determinants of Option Value are, essentially, the inputs required for such a model. The following table
summarises the key inputs required for the modified Black-Scholes models and their effect on the option
values.
Effect of Increase in Input on values for:

Input
Call (Delay, Expand) Put (Abandon)
Current Value of Underlying Asset Increases Decreases
Variance in value of the underlying asset Increases Increases
Dividends or cash flows from the asset Decreases Increases
Exercise Price of the option Decreases Increases
Time to Expiration of the option Increases Increases

Risk free interest rate for life of the option Increases Decreases
It should be noted that this model is essentially designed to value options on financially traded assets where
inputs are readily available from market data sources. When applying such models to ‘real’ options, some
alternative Adjustments and Assumptions can be made in order to assist application. The following underlying
assumptions of the Black-Scholes model illustrate this.
• The value of the asset is continuous (i.e. no price jumps). While this is reasonable to expect for traded
assets, non-traded assets often change value erratically. For many real options this will underestimate the
value. An alternative is to utilise higher variance estimates to accommodate for such price jumps.
• The variance is known and constant. When applied to long-term real options, the assumption that the price
variance is known and does not change over the lifetime of the option is unreasonable. Again, adjustments
can be made to variance estimates to accommodate for this.
• Exercise is instantaneous. In many real option scenarios, exercising may take up to several years (e.g.
building a new plant under Expansion). In this case, the life of the option should be reduced to
accommodate the time required to exercise.
While making such adjustments to the inputs may seem to weaken the valuation process, it is the
understanding of limitations and sensitivity to changes in these inputs that highlights the existence and value of
strategic options apparent.
The Option to Delay a Project
Under traditional investment analysis (such as that accomplished by the Investment Valuation model), it is
reasonable to accept or reject an investment proposal based on its net present value based on the expected
cash flows and discount rates at the time of the analysis. However, such cash flows and discount rates change
over time, therefore a proposal that has a negative net present value today may have a positive net present
value in the future. The option to Delay a project represents the value gained by waiting to take advantage of
any upside volatility in the net present value.
Inputs: On clicking the ‘Start’ button in the ‘Menu’ sheet, a form is displayed for the inputs for the option to
Delay a project. These are:
• Name of the proposed project. This is used for output display purposes.
• Present Value of cash flows from investing in the project today. This represents the present value of cash
flows received by making the investment but does not include the actual investment cost. This input can be
obtained directly from traditional discounted cash flow analysis, such as that supplied by the Investment
Valuation model.
• Standard deviation of present value. This represents the uncertainty surrounding the cash flows and
resulting present value of the investment. Such variations in cash flow estimations are likely to be due to
uncertain market size and share, technology shifts, and/or supply costs. Nevertheless, the standard
deviation of present value can be estimated by one of the following methods, in order of preference:
1. If similar projects or investments have been undertaken or made in the past the standard deviation of
cash flows resulting from these projects can be used as a proxy for the standard deviation in cash flows
for the proposed investment.
2. Probability analysis can be run on simulations of key inputs, such as revenue and cost drivers, market
size and market share, to estimate the standard deviation of the resulting present value. While this type
of analysis can be accomplished by using sampling analysis in the Analysis ToolPak add-in shipped with
Excel, third-party add-ins, such as “Crystal Ball” can facilitate more sophisticated applications.
3. The standard deviation of publicly traded firms in the same business or industry can be used a proxy for
the proposed investment. This is the least preferred method due to the likely diversity of activities
undertaken in other firms and resulting differences in variance characteristics. Nevertheless, such
industry specific volatility data can be obtained from third party market data providers (such as those
recommended at the Excel Business Tools web site) and entered into the Pre-Defined sheet for future
use across models and proposals. It should be noted that the Pre-Defined sheet can also be utilised to
store standard deviation data from similar projects undertaken in the past as described in the first
method.
• The present value of investment needed to take the project today. The option to delay the project is
exercised when it is decided to invest in it. The investment required, therefore, represents the exercise
price of the option. This can be obtained directly from the traditional discounted cash flow analysis, such as
that supplied by the Investment Valuation model.
• Life of the project rights and corresponding risk-free rate. The option to delay the investment expires when
net present value from doing so is zero. This is based on the assumption that the market forces of
competition will eventually drive the return down to the discount rate. As such, the expected life of the

option should represent the period in which exclusive rights or competitive advantage is expected to prevail
for. This may be estimated from previous investments made by the firm or in the industry, or from the
capital budgeting assumptions used in the traditional discounted cash flow analysis. The risk-free rate
corresponding to this period should also be entered here and can be obtained from the equivalent
government bond rate prevailing for the same period.
• Cost of Delay (dividend yield). For every year after the net present value of the project turns positive, there
is a cost of delaying the project equal to the positive cash flows forgone by not undertaking it. If these cash
flow are distributed evenly over the life of the option (n), then the annual cost of delay can be expressed as
1/n (e.g. a 5 year option translates into a 20% annual cost of delay). The default option here calculates the
cost of delay along these lines; however, an alternative percentage annual cost of delay can be used here to
evaluate other cash inflows or outflows forgone on delaying the investment.
Results: Upon clicking OK, the resulting valuation of the option to Delay is displayed on the ‘ModBS’ sheet. The
first section shows the inputs from the form that can be altered directly here for sensitivity testing.
The next section displays the Outputs, including the key calculation parameters, overall valuation of the option
to delay, and a textual summary of the results. The parameters N(d1) and N(d2) represent the range of
probability that the project will become viable before the end of the options life. The detailed formula for actual
valuation of the call option can be viewed by Clicking on the Overview button in the top right corner of this
section. Based on this valuation and the traditional net present value of the project, the textual summary
concludes as to whether the project should or should not be undertaken immediately. This summary can be
useful for direct insertion into business case proposals and reports.
The final section displays the Partials of the valuation, which are essentially calculations to test the sensitivity of
the options value to changes in input values. These are:
• Delta. Delta represents the amount that the option price will move given a small change in value of the
project cash flows. An increase in volatility will tend to move the delta of the option towards 50.
• Gamma. Gamma represents the amount that the options delta will move given a small change in value of
the project cash flows. Gamma increases as expiration approaches.
• Theta. Theta represents the rate that the value of the option decreases, as the time remaining to
expiration decreases. Theta is also referred to as time decay or amortisation. Theta is highest when the
present value of cash flows from the project is at or just below the present value of costs needed to make
the investment.
• Vega. Vega represents the options sensitivity to changes in volatility. Longer term options are more
sensitive to changes in volatility and therefore have higher Vega.
• Rho. Rho represents the options change in value given a change in interest rates (risk-free rate). Increased
interest rates will increase the value of call options, such as the option to Delay.
The Option to Expand a Project
It is not unusual for firms to make “seed” investments into projects, which may even have negative net present
values by themselves, but allow the possibility to enter other projects and markets in the future. In such cases
the firm is willing to pay a price for the possibility of expanding into these new markets. The option to Expand
a project represents the value gained by entering a project today that can offer the ability to participate in
future projects with potential upside value.
Expand a project. These are:
• Name of the proposed project. This is used for output display purposes.
• Present Value of expected cash flows that will accrue from expansion. This represents the present value of
cash flows received in the future by expanding into new markets, not including the cost of making the
expansion.
• Standard deviation of present value. This represents the uncertainty surrounding the cash flows and
resulting present value of the cash flows from expansion. Such variations in cash flow estimations are likely
to be due to unknown market dynamics that can change the profitability of expansion. Nevertheless, the
standard deviation of present value can be estimated by one of the following methods, in order of
preference:
1. If similar projects or markets have been undertaken or made in the past the standard deviation of cash
flows resulting from these projects can be used as a proxy for the standard deviation in cash flows for
the potential expansion.

the potential expansion. This is the least preferred method due to the likely diversity of activities
store standard deviation data from experiences in similar markets entered in the past as described in the
first method.
• The present value of investment costs needed to make the expansion. The future investment required to
make the expansion represents the exercise price of the option. This can be obtained directly from
traditional discounted cash flow analysis, such as that supplied by the Investment Valuation model. The
present value of this cost is likely to be higher than the present value of expected cash flows from making
the expansion; otherwise the expansion would be undertaken immediately.
• Life of the expansion rights and corresponding risk-free rate. The option to expand the project expires when
the opportunity to expand is no longer possible. This is based on the assumption that expansion of the
project after this date would yield a net present value of zero as competition would have already entered
and dominated the market. As such, the expected life of the option should represent the period in which
exclusive rights to expand is expected to prevail for. This may be estimated from previous investments
made by the firm or in the industry, market dynamics and competitive environment, or from the capital
budgeting assumptions used in the traditional discounted cash flow analysis. The risk-free rate
corresponding to this period should also be entered here and can be obtained from the equivalent
• Annual cost of waiting to expand when expansion is viable. As soon as the present value of cash flows from
expansion outweighs the present value of cost to expand, there is a cost of delaying the expansion. This
input represents the annual cost of delaying expansion, represented by a percentage of the present value of
cash flows expected to be accrued from expansion (the first input). In determining this percentage,
consideration should be given to the responsive ability of competitors to make the expansion instead.
Results: Upon clicking OK, the resulting valuation of the option to Expand is displayed on the ‘ModBS’ sheet.
The first section shows the inputs from the form that can be altered directly here for sensitivity testing.
to delay, and a textual summary of the results. The parameters N(d1) and N(d2) represent the range of
probability that the option to expand will become viable before the end of the options life. The detailed formula
for actual valuation of the call option can be viewed by Clicking on the Overview button in the top right corner
of this section. Based on this valuation and the traditional net present value of the project, the textual
summary calculates the total value of the project including the embedded option value to expand. This
summary can be useful for direct insertion into business case proposals and reports.
• Delta. Delta represents the amount that the option price will move given a small change in value of cash
flows from expansion. An increase in volatility will tend to move the delta of the option towards 50.
the underlying asset. Gamma increases as expiration approaches.
present value of cash flows from expansion is at or just below the present value of costs to make the
expansion.
interest rates will increase the value of call options, such as the option to Expand.
The Option to Abandon a Project
Not all projects or investments are successful and when the cash flows do not measure up to the original
expectations, it is useful to value the option to Abandon the project. The option to Abandon a project
represents the difference between the present value of continuing the project to the end of its useful life and
the present liquidation value of the project.

Abandon a project. These are:
• Name of the existing project. This is used for output display purposes.
• Present Value of expected cash flows from continuing with the project as planned. This represents the
present value of re-evaluated cash flows received by continuing with the project or investment until the end
of its useful life.
• Standard deviation of present value. This represents the uncertainty surrounding the cash flows for the
remaining expected life of the project which is why the option to abandon it is being considered.
Nevertheless, the standard deviation of present value can be estimated by one of the following methods, in
order of preference:
the project. Moreover, if the original project proposal had included an evaluation of the option to Delay,
the standard deviation of cash flows used for this could be used again here.
2. Probability analysis can be run on simulations of key inputs, such as re-evaluated revenue and cost
drivers, market size and market share, to estimate the standard deviation of the resulting present value.
While this type of analysis can be accomplished by using sampling analysis in the Analysis ToolPak add-
in shipped with Excel, third-party add-ins, such as “Crystal Ball” can facilitate more sophisticated
applications.
the project. This is the least preferred method due to the likely diversity of activities undertaken in
other firms and resulting differences in variance characteristics. Nevertheless, such industry specific
volatility data can be obtained from third party market data providers (such as those recommended at
the Excel Business Tools web site) and entered into the Pre-Defined sheet for future use across models
and proposals. It should be noted that the Pre-Defined sheet can also be utilised to store standard
deviation data from prior option valuation on the project and past investments as described in the first
method.
• The expected proceeds from abandonment (net of abandonment costs). The expected proceeds from
abandonment represent the exercise price on the put option. However, this assumes that the liquidation
proceeds do not change over the remaining life of the project. In absence of any contractual agreements
on liquidation value, this makes such a value difficult to estimate. In such a case, sensitivity of the
valuation to this can be a worthwhile exercise. If the overall proceeds are negative (due to the costs of
abandonment outweighing the liquidation value), it would only be worth considering the option to abandon
if the remaining present value of cash flows were even more negative.
• Time for which the option to abandon holds and corresponding risk-free rate. The option to abandon the
project expires when it is no longer possible to liquidate. This is determined on the overall ability to
abandon the project and/or contractual arrangements. This may be estimated from market analysis and
evaluation of potential synergies that would make the project marketable to interested parties. The risk-
free rate corresponding to this period should also be entered here and can be obtained from the equivalent
• Cost of Abandonment (Dividend Yield). There is a cost to abandoning the project as any value creating cash
flows that would have been received after abandonment are forgone. If these cash flow are distributed
evenly over the life of the option (n), then the annual cost of abandonment can be expressed as 1/n (e.g. a
5 year option translates into a 20% annual cost). The default option here calculates the cost of
abandonment along these lines; however, an alternative percentage annual cost of abandonment can be
used here to evaluate other cash inflows or outflows forgone after abandoning the project.
Results: Upon clicking OK, the resulting valuation of the option to abandon is displayed on the ‘ModBS’ sheet.
The first section shows the inputs from the form that can be altered directly here for sensitivity testing.
to abandon, and a textual summary of the results. The parameters N(d1) and N(d2) represent the range of
probability that the project will be abandoned before the date when it is no longer possible to abandon. The
detailed formula for actual valuation of the put option can be viewed by Clicking on the Overview button in the
top right corner of this section. Based on this valuation and the traditional net present value of the projects
remaining cash flows, the textual summary calculates the total value of the project including the embedded
option value to abandon. This summary can be useful for direct insertion into business case proposals and
reports.

• Delta. Delta represents the amount that the option price will move given a small change in value of cash
flows from expansion. An increase in volatility will tend to move the delta of the option towards 50.
the underlying asset. Gamma increases as expiration approaches.
present value of the project’s remaining cash flows is at or just below the expected net proceeds from
abandonment.
interest rates will decrease the value of put options, such as the option to Abandon.
Binomial Option Pricing
The Binomial Option pricing tool offers a more advanced application of Real Option Valuation where there exists
“options on options”. The binomial model is able to evaluate the present value of an unlimited number of
branches where at each node the value of the underlying asset or investment can go either up or down. This is
useful for evaluating more complex real world situations where a wide range of possible outcomes may exist,
and is especially powerful when re-evaluating the value as certain outcomes eventuate.
As the estimation of positive and negative outcome values and probabilities can be difficult to estimate, the
model facilitates this by providing an approximation to the normal distribution, whereby underlying cash flow
volatility is automatically translated into upward and downward outcome results. Moreover, this assumption
that underlying asset volatility is distributed normally (as assumed by the Black-Scholes model above), can be
relaxed to model scenarios where the possible outcomes (volatility) are skewed either positively or negatively.
This flexibility literately enables a limitless number of possible real option valuation scenarios.
On clicking the ‘Start’ button in the ‘Menu’ sheet; you are taken to the ‘Binomial’ sheet. Binomial branches can
be created or deleted by selecting a dark blue colour cell with white text labelled “Valuation”, and clicking the
corresponding button at the top left.
Creating a Branch: By clicking the Create Branch button, a form is displayed for the inputs to create the
binomial option branch. These are:
• Annual risk-free rate. This is used in the valuation to create a replicating portfolio consisting of the
underlying asset and the risk-free asset. The equivalent 1-year government bond rate can be used here.
• Annual dividend yield. The dividend yield represents the expected cash flow from the underlying asset. This
is presented in the final output as the cash flow forgone if the decision is made not to invest. A negative
dividend yield can be entered to reflect a required cash injection to maintain the asset. The annual dividend
yield is adjusted for the length of the option's life. If there is no dividend yield, zero should be entered here.
• Period Length and Number of Periods. The length of the option can be expressed in years, semi annually,
quarterly, or monthly. The number of periods below this specifies the total length of the options life. Bear in
mind that the total option life is limited to 5 years. If a longer time period is required, multiple branches
can be created to accommodate.
• Allow early exercise? Checking this box essentially turns the option into an American style option, whereby
exercise can be made at any point up until the end of the option’s life. This added flexibility increases the
value of options created with multiple branches.
• Estimated Asset Value Now. This represents the present value of expected cash flows from the asset or
project, but doesn’t include costs of undertaking the investment or regular cash inflows or outflows to and
from the asset (dividends). This can be obtained directly from traditional discounted cash flow analysis,
such as that supplied by the Investment Valuation model.
• Estimated cost of Investment. This represents the present value of investing in the asset or project, not
including regular ongoing funding requirements which can be treated as negative dividends in the earlier
input parameter. This can also be obtained directly from traditional discounted cash flow analysis.
• Probability parameters. This section defines the upward and downward multipliers which determine the
positive and negative outcome values for the option. Desired or estimated values for either one can be
entered directly here. Based the risk neutral probabilities of outcome under the Normal distribution
(assuming that the risk-free rate has been entered), the form automatically calculates the outcome
probabilities and underlying cash flow volatility in the box below. Note that these multipliers can be altered
later in the worksheet to relax the assumption of normally distributed returns and model alternative
scenarios.

• Use Volatility Assumptions. Alternatively, if the expected outcomes of the option are unknown, asset or
project value volatility can be used and the upward and downward multipliers will be calculated
automatically based on the approximation to the normal distribution. The standard deviation (volatility) of
present value can be estimated by one of the following methods, in order of preference:
the asset or project.
first method.
On clicking the ‘Create’ button, the binomial branch is created on the worksheet with both upward and
downward value outcomes, key inputs and resulting option value in the original valuation box. All cells
highlighted with a light blue colour can be manipulated directly here to model alternative distributions and
outcomes. Only the upward multiplier probability can be changed to modify outcome probabilities. This is
because both probabilities must sum to 100%, and the downward probability changes automatically to
accommodate. Further binomial branches can now be created in the same way by selecting the “Valuation” cell
on either of the two outcomes. The valuation at the beginning node changes to account for all subsequent
branches (outcomes).
Deleting a Branch: To delete a branch, you must select the “Valuation” cell on the node for which the branch
was created from, and click the ‘Delete Branch’ button in the top left corner. Only end branches can be deleted
in this way; therefore to delete multiple branches, you must start at the end and work backwards.
Game Theory Analysis
The Game Theory model utilises real option pricing and Nash equilibrium to calculate the expected strategy and
payoff for two firms in a competitive environment. The information provided from such an analysis is extremely
useful to evaluate proposals to enter a competitive market. The models works by evaluating each firm’s
optimal strategy in order to launch the product or service in the market (exercise a call option) in relation to its
competitor. Each firm can be either, a leader (enter the market first), a follower (enter after), or both firms
could enter simultaneously. The model calculates the probabilities for each of these scenarios and the resulting
expected payoff.
Inputs: On clicking the ‘Start’ button in the ‘Menu’ sheet; you are taken to the ‘Game’ sheet. Inputs are
entered into the cells highlighted with alight blue colour. Assistance for both input and calculated parameters
can be sought by selecting the relevant cell and clicking the Help button to the right. The key inputs required
for the model are:
• Investment required. This is the present value of costs required to enter the market with the new product
or service. This represents the exercise price on the call option to enter the market. This can be obtained
directly from traditional discounted cash flow analysis, such as supplied by the Investment Valuation model.
• Annual Growth Rate of Potential Market Cash Flow. This is the expected grow rate of total market cash
flows. Since this is difficult to estimate, underlying growth of the entire economy can be used as a
substitute. Annual Gross Domestic Product (GDP) growth can usually be obtained from National Statistical
Offices or third party market data providers.
• Annual Standard Deviation of Cash Flow in Target Market. This represents the volatility of expected cash
flows in the market for which the product or service is to be launched. The standard deviation of cash flows
can be estimated by one of the following methods, in order of preference:
the market.
2. Probability analysis can be run on simulations of key inputs, such as demand and supply drivers and
constraints, to estimate the standard deviation of the market cash flows. While this type of analysis can

be accomplished by using sampling analysis in the Analysis ToolPak add-in shipped with Excel, third-
party add-ins, such as “Crystal Ball” can facilitate more sophisticated applications.
first method.
• Inverse Demand Function for 1 firm in market. The inverse demand function specifies how ‘elastic’ the
market is to marketing efforts. The default value of 1 here means that if 1 firm is in the market, it receives
1 times (or 100%) of the market cash flows.
• Inverse Demand Function for 2 firms in market. In a similar fashion to the previous input this specifies the
percentage of original market cash flows available to the firm when 2 firms are marketing the product or
service. The default value here of 0.75 is based on typical real world scenarios, whereby marketing efforts
of two firms increase the market size by 50%. The resulting 150% of the original market size is shared
between firms, thereby receiving 0.75 (or 75%) each.
• Risk-free rate. This is the annual risk-free interest rate used in the analysis to create a replicating portfolio
consisting of the underlying asset and the risk-free asset. The equivalent 1-year government bond rate can
be used here.
• Current expected annual level of cash flow in market. This represents the current annual size of the market
for proposed product or service. This can be built up from assumptions using historical data from similar
products, market surveys, demographics, or macro economic data. While this is a key input to drive the
results of the analysis, sensitivity analysis is undertaken to assist in understanding its impact.
Parameters are calculated from these inputs to drive the analysis. These are:
• Level of annual market cash flow for Follower to enter market. This is the total annual market cash flows
required for the following firm to enter the market (i.e. after another firm has already entered).
• Follower’s Payoff Value. This is the expected present value of cash flows available to the following firm.
• Value of Leader’s future profit flow. This represents the present value of cash flows that the leading firm will
receive assuming the following firm undertakes a following strategy. The Leader receives monopoly cash
flows from the market until the market size reaches the level where it makes sense for the Follower to
enter. After that, both firms receive duopoly cash flows.
• Leader’s Payoff Value. This represents the value of the Leaders future profit flow less the investment
required to enter the market (exercise price).
• Value if both firms exercise immediately and simultaneously. This considers the present value of cash flows
available to each firm if they both enter the market with the product or service at the same time.
• Simultaneous Payoff Value. This represents the value of the cash flows entering the market simultaneously
with the competitor less the investment required to enter the market (exercise price).
• Annual market cash flow where value of Leading equals Following. This represents the unique annual level
of market cash flow where the value of being a Leader equals the value of being a Follower. In order to
calculate this parameter (under the Nash equilibrium), the Solve program needs to be run by clicking the
Solve button to the left. If any of the inputs are subsequently changed, ‘Required’ will appear in red text
underneath this button to indicate that the Solve program needs to be rerun.
Sensitivity Table: Below the main parameters section is a table displaying the strategy probabilities and
resulting expected payoff for different levels of annual cash flow in the market. The first row shows the
expected level of market cash flows and corresponding results. Next, two rows show levels of annual market
cash flow is below the level where leading equals following. In this case, each firm will wait until cash flow
reaches this level, which is displayed underneath.
Below this two more levels of annual cash flow are shown greater than the level where leading equals following
and less than the level where it pays to follow. In this region, each firm will consider leading and the
probability to exercising increases as the level of cash flows available increases.
Finally, the level of annual market cash flows where it pays to be a follower is displayed with two levels greater
than this underneath. For these levels, both firms with enter the market immediately and simultaneously.
Results Summary: Below the sensitivity analysis is a textual summary of results for the expected annual level
of market cash flows. This provides an explanation of each of the key parameters, strategy probabilities for
each firm, and resulting expected payoff. This summary can be useful for direct insertion into business case
proposals and reports.

Portfolio Optimisation
(Determining the optimal mix of products and businesses)
The Portfolio Optimisation model is based on the Theory developed in the 1950s by Harry Markowitz who
won a Nobel Prize for his work. The theory is based on the efficient market hypothesis where the optimal
portfolio can be found graphically as a tangent to the risk-free interest rate. Based on the correlation of
historical product returns, random scenarios of product weightings are then generated to find the combination
with the highest return for the lowest risk (risk is a function of the products’ historical volatilities). This
combination is determined by finding the optimal Sharpe Ratio which is equal to the portfolio’s return less the
risk-free rate calculated and then divided by the standard deviation of returns.
The model has been designed to be applied to either financial instrument or business portfolios. The ability to
apply optimisation analysis to a portfolio of businesses represents an excellent framework for driving capital
allocation, investment, and divestment decisions at a corporate level.
Setting up the Inputs
The first step is to input the required data into the Input sheet. The required inputs are:
• Risk free Rate. This is the risk-free interest rate that corresponds to the frequency for which historical
observation data is entered further down the worksheet. The equivalent government bond rate can be used
here.
• Maintain Return Level. Selecting this option ensures that the optimised portfolio’s return is at least that of
the current portfolio. This is accomplished by rejecting any random weighting iteration that has a return
less than that of the current portfolio weightings.
• Target Return. The target return level (for the time period corresponding to historical observation price
data) is used to display a probability of reaching this level in both the current and optimised portfolios. This
is accomplished using Monte Carlo simulation.
• Min and Max Constraints. Minimum and Maximum constraint weightings can be used to bias the
optimisation process in line with benchmark guidelines or limitations. This can be used where there are
liquidity limitations or obligations to hold products such as short sale positions. A percentage between 0
and 100% should be entered here above each product or business unit data.
• Current Units. The current number of units held in each product or business is entered in this row. This is
used to calculate the current portfolio weightings by applying the last observations’ price.
• Historic Price Data. Enter Product or Business names in this row. Up to 30 products or businesses can be
entered for optimisation. Underneath this, price or dollar return data should be entered under each product
or business. The number of observations is unlimited but must be the same for each product or business.
When applying the model to a portfolio of businesses, the historical economic profit of each business unit
should be entered here. Because the model assumes that each business is independent, effort should be
made to allocate overhead costs to each business as much as possible. This can be accomplished through
methods such as Activity Based Costing for which a number of useful reference resources can be found at
the Excel Business Tools web site.
• Historic Observation Periods. The dates corresponding to the price data entered for each product or
business can be entered here. This input is optional. Note that the time interval for observation price data
must correspond to the risk-rate and target return percentages entered above.
Running the Optimisation Process
Once the inputs have been established, the optimisation process can be run by clicking the Optimise Portfolio
button. This is a 3 step process which runs random iterations of portfolio weightings, sorts the weightings to
find the optimal Sharpe Ratio, and runs Monte Carlo Simulation of portfolio returns. During this process, the
program enters data into the ‘CoVar’ sheet which displays a matrix of variance and covariance statistics
between each of the products or businesses. A formula in cell E4 of this sheet calculates the number of
iterations for the program to run based on the number of products. This calculation is based on achieving a
satisfactory level of statistical significance in the analysis; however, it can be overwritten to a lower number to
speed up the processing time of the optimisation process. This maybe necessary for optimising a large number
of products on computers with lower processing speed and memory specifications.

Analysing the Results
Upon running the optimisation process you will be taken directly to the ‘Results’ sheet. The sheet shows the
current portfolio on the left and the optimised portfolio on the right. For each of these, a pie chart displays the
product or business weightings. Underneath this, the results of the Monte Carlo Simulation show the return
distribution of returns for the portfolio. The axis for each portfolio’s return distribution graph is set to the same
scale, to illustrate the optimised portfolio’s enhanced risk/return attributes. Beneath these graphs is the
portfolio’s return, standard deviation and resulting Sharpe Ratio as well as the probability of achieving the
target return specified in the ‘Input’ sheet. It should be noted that these results are in the frequency specified
by the historical price data in the ‘Input’ sheet. If, for example, the historical price data is specified in months,
these results are also based on months. To convert monthly results to annual equivalents, the return should be
multiplied by 12 and the standard deviation should be multiplied by the square root of 12 (multiplying by the
square root of time is required to convert standard deviation data).
Below this analysis is a table listing each product or business with current structure, theoretical change and
optimal structure specified in percentage weightings and number of units. The theoretical change columns
indicate the acquisition and liquidation actions required to arrive at the optimal portfolio. These are labelled as
theoretical as they are based on historical data, and the relationships between products that drive this cannot
be guaranteed to be replicated in the future. They do, nevertheless, provide valuable information on how the
products or businesses behave as a portfolio and can assist in making acquisition and liquation decisions.
Applications to Business Portfolios
A business is simply a collection of investments. Portfolio optimisation can be applied at a variety of different
levels within an organisation reconciling up to the total organisation. Such levels typically include business
units making up the entire organisation, products and services making up business units, and so on. It is
important that profitability for each business or product can be identified by attributing costs and revenues that
otherwise be recorded at an aggregated level. Methods such as Activity Based Costing can assist in
accomplishing this. In utilising the model for a portfolio of business units, two applications are particularly
useful for specific decision-making purposes. These are:
• Capital Allocation. By running the analysis on all businesses currently undertaken by the organisation, the
results of the optimised portfolio can provide a useful basis on where and where not to allocate capital
available. This can be particularly useful during business planning phases in order to prioritise competing
capital requirements in plans from ongoing business units.
• Investment and Divestment. For proposals on investment into new businesses, it is useful to run the
optimisation process on all current business units without the new business and all businesses with the new
business. The difference between the two risk and return parameters can be useful for evaluating the
impact that the new business will have on the current structure of the organisation. Conversely, omitting
an existing business unit from the analysis can assist in decisions to divest the business unit and the impact
that it will have on the overall organisation.

Portfolio Performance Monitoring
(Monitoring and tracking performance of financial assets)
The Portfolio Performance Monitoring model enables the ongoing monitoring and periodic valuation of a
portfolio of financial investments. The model allows the entering of investment transactions during a reporting
period to calculate performance. Furthermore, incremental investment transactions undertaken during a period
are fully accounted for in the period’s performance calculations by utilising the ‘Money Weighted Return’. Roll
over of the model and archiving of transactions make the model suitable for monitoring and tracking a portfolio
on an ongoing basis.
Model Overview
The Value sheet calculates the net gain or loss over the valuation period. It is also provides buttons for critical
functions including adding new products, deleting existing products, hiding or unhiding product categories, and
“rolling over” the portfolio to a new reporting period. Details of new products are entered into this sheet, as are
market valuations of products at the time of reporting. Parameters entered and displayed on this sheet are:
• Product Name. The name of the investment product.

• First Invested. The date that the investment was first invested
• Capital Contribution. The amount invested on the first investment date.
• Value at Start of Period. The value of the investment at the start of the reporting period.
• Current No. of Units. The current number of investment units (as at the reporting date)
• Unit Price. The current price of each unit (as at the reporting date)
• Current Valuation (formula). The current number of units, multiplied by the unit price.
• Maturity Date. (Optional) The date that the investment will mature or redeem.
• Gain/ (Loss) since Start (formula). The difference between the value at the start of the reporting period and
the current valuation, divided by the value at the start of the reporting period.
The Trans sheet is for manually entering transactions on products as they occur. It also calculates incremental
returns from distributions. This sheet records transactions for the reporting period which are then taken into
account when calculating the performance of each investment. Parameters entered and displayed on this sheet
are:
• Product Name (pre-populated). The name of the investment product.

• Description. (Optional) A description of the transaction.
• Type (pre-populated). The type of transaction - either 'Distribution' (interest/dividends received or
equivalent) or 'Investment' (purchases, withdrawals [negative], or reinvestment).
• Date. The date of the transaction.
• Units. The number of investment units transacted.
• Unit Price. The transaction price per unit.
• Net Amount (formula). The transaction units, multiplied by the unit price.
• Tax Amount. (Optional) The amount of tax attributable to the transaction.
• Gross Amount (formula). The tax amount subtracted from the net amount.
The Perf sheet calculates and displays the performance of the portfolio over the reporting period by taking into
account the transactions over the period and the valuation parameters. Information on formulas utilised to
calculate performance is provided in corresponding help icons. There is no manual entry in this sheet.
Parameters displayed on this sheet are:
• Product Name. The name of the investment product.

• Value at Start of Period. The value of the investment at the start of the reporting period.
• Capital Added or Withdrawn In Period. The sum of all investment (or divestment) transactions made during
the period.
• Current Valuation. The current reported valuation of the investment (as at the reporting date).
• Capital Invested Over Period. The sum of all investment (or divestment) transactions made during the
period (repeated for logical display purposes).
• Income Distributed Over Period. The sum of all distribution transactions made during the period.
• Net Return Over Period. The net return made from the investment during the reporting period (see
corresponding help for detailed explanation).
• Annual Return Since Inception. The annualised return of the investment since the date it was first invested
(see corresponding help for detailed explanation).

The Graph sheet automatically creates a pie chart illustrating current portfolio weightings and the History sheet
stores all transactions prior to the current valuation period, in chronological order.
Adding New Products
1. Click on the ‘ADD NEW PRODUCT’ button in the Value sheet.

2. Choose which category the new product should go into and its name from the form that is displayed.
3. Enter the details of the new product into the Value sheet. Make sure the details are entered in the cells on
the newly created row. The program automatically inserts and names cells for formula calculation in
subsequent worksheets.
Deleting Products
1. Click on the ‘REMOVE PRODUCT’ button in the Value sheet.

2. Choose which category the existing product should be deleted from, from the form that is displayed.
3. Choose the product from the second drop-down box in the form. A dialogue box will confirm your selection
before the product is completely removed from the portfolio.
Entering Transactions
When a new product is added, two transaction spaces are allocated for each of Distribution and Investment
type transactions. If additional transactions rows are required, select a cell displaying 'Distribution' or
'Investment' and click the ‘Add New Row for Transaction' button. These additional transaction rows are
automatically removed when the Portfolio is 'Rolled Over' to a new reporting period (detailed below).
Transactions can be entered by the following process:
1. Go to relevant product in ‘Trans’ sheet.

2. Enter transaction under either Distribution or Investment. Distributions include all interest/dividends
received or equivalent. Investment includes purchases, withdrawals (negative), or reinvestment. For
example, if distributions are reinvested, two entries are required - one as a positive distribution, and one as
a positive investment. Similarly, if the entire investment is withdrawn, a positive distribution transaction
and negative investment transaction is required on the date of the liquidation.
3. Enter the transaction details in the cells provided.
Executing Reports
Portfolio reports can be executed at any time by the following process:
1. Enter the date of valuation in the Date of Valuation cell at the top of the Value sheet. This is defaulted to
the current days date by the formula ‘=NOW()’ but can be overwritten to allow for valuations at prior points
in time.
2. Enter the Current Valuations and Number of Units as at the valuation date into the value sheet. This means
typing over the previous valuations. Alternatively, data can be linked from external sources such as other
spreadsheets or third party market data provider add-ins.
3. If calculation is set to ‘manual’ in your Excel default options, press the F9 key to calculate and the reports
will update automatically.
4. Print out reports as required.
5. Click on the ‘ROLL OVER TO NEW PERIOD’ button. Essentially this program refreshes the file ready for the
next reporting date. It executes the following tasks.
• Copies the values in the Current Valuation column to the Value at Start of Period column and the Value
Date to Start Date in Value sheet.
• Clears out the transactions in the Trans sheet and puts previous period’s transactions in chronological
order into History sheet.

Understanding Your Reports
The majority of information provided by the reports is self explanatory. However clarification is needed to
explain the return formulas in the performance valuation report.
Net Return Over Period:
The net return over the period in it’s simply form is calculated by:
Current Value – Adjusted Start Value + Cash Distributions
Adjusted Start Value
The ‘Adjusted Start Value’ represents the starting value adjusted for any withdrawals or incremental
investments made during the period. Because the current value is influenced by the timing of these
transactions, we account for the timing in the adjusted start value. Suppose, for example, a large part of the
investment was liquidated soon after the start date but long before the valuation date. The start value is
therefore ‘artificially’ inflated for the valuation period because the current valuation is based on a smaller
amount of capital invested than indicated by the start value. In this case, the net return would be understated
by assuming that more capital was investment for the full period than was actually the case. The solution is to
adjust the start value by taking into account the magnitude and timing of investment and divestment
transactions during the reporting period.
The adjusted start value is calculated via the following formula.

Start Value + (total incremental investments X (Weighted Avg. No. days from Value date
Total No. days in period))
This calculation is also known as ‘Money-Weighted’ or ‘Dollar-Weighted’ Return.
Annual Return Since Inception:
This formula annualises the return since inception via the following formula.
(Prior return since inception + Net Return over current period) X 365
(Value date - Original investment date)
This is the average annual performance since the original investment was made.

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Empowering Business Decision-Making

with Excel Business Tools

A Practical User Guide

Project Planning and Management..................................................................................................... 7

Multiple Regression Analysis and Forecasting.................................................................................. 13

Empowering Decision-Making with Excel Business Tools – a Practical User Guide 2

© Excel Business Tools

Investment and Business Valuation ................................................................................................. 15

Real Option Valuation ...................................................................................................................... 20

Empowering Decision-Making with Excel Business Tools – a Practical User Guide 3

© Excel Business Tools

Portfolio Optimisation ...................................................................................................................... 28

Portfolio Performance Monitoring .................................................................................................... 30

Empowering Decision-Making with Excel Business Tools – a Practical User Guide 4

© Excel Business Tools

Empowering Decision-Making with Excel Business Tools – a Practical User Guide 5

© Excel Business Tools

Empowering Decision-Making with Excel Business Tools – a Practical User Guide 6

© Excel Business Tools

Defining the Project Resources

Empowering Decision-Making with Excel Business Tools – a Practical User Guide 7

© Excel Business Tools

Defining and Entering Project Tasks

Adding New Tasks:

Empowering Decision-Making with Excel Business Tools – a Practical User Guide 8

© Excel Business Tools

Editing and Updating Existing Tasks:

Running the Auto-Timing:

Empowering Decision-Making with Excel Business Tools – a Practical User Guide 9

© Excel Business Tools

Creating the Gantt Schedule

Running and Analysing the Project Status Report

Earned Value Analysis:

Empowering Decision-Making with Excel Business Tools – a Practical User Guide 10

© Excel Business Tools

From these three performance measures, two variances can be calculated:

Cost Risk Analysis:

Empowering Decision-Making with Excel Business Tools – a Practical User Guide 11

© Excel Business Tools

Participant Emailing and Workbook Generation

Updating Progress Details from External Workbooks

Empowering Decision-Making with Excel Business Tools – a Practical User Guide 12

© Excel Business Tools

Analysing the Output

Empowering Decision-Making with Excel Business Tools – a Practical User Guide 13

© Excel Business Tools

Forecasting the Dependent Variable

Empowering Decision-Making with Excel Business Tools – a Practical User Guide 14

© Excel Business Tools

Setting the Assumptions

Empowering Decision-Making with Excel Business Tools – a Practical User Guide 15

© Excel Business Tools

Financial Data Input

Empowering Decision-Making with Excel Business Tools – a Practical User Guide 16

© Excel Business Tools

The next category of parameters deals with accounting depreciation conventions:

The next category of parameters deals with tax depreciation conventions:

Empowering Decision-Making with Excel Business Tools – a Practical User Guide 17

© Excel Business Tools

Analysing and Utilising the Results

Empowering Decision-Making with Excel Business Tools – a Practical User Guide 18

© Excel Business Tools