ESD.70J Engineering EconomyToday’s class outlineAbout this classCourse websiteOther coursesThis class is :Course OutlineCourse MaterialsGood HabitsCourse PhilosophyHuman (in-)ability to forecastModeling with dynamic mentalityWhy Excel?Why not ExcelRecommended versionsSession one – Big vs. SmallProper spreadsheet setupNet Present Value (NPV) primerSet up NPV base caseBig vs. Small setupWorksheet for Plan ASlide 22Give it a try!Worksheet for Plan BConclusion?Few Excel tricksSensitivity AnalysisPowerPoint PresentationData TablesOne-way Data TableSlide 31Slide 32One-way Data Table (Cont)More Excel tricksModifying Data TablesSlide 36Two-way Data TablesSlide 38Slide 39Slide 40Conditional formattingSlide 42Excel chartsSlide 44The Chart WizardSlide 46Chart exampleSlide 48Goal SeekGoal Seek ExampleAdditional note: NPV functionAdditional note: Text functionSlide 53Questions? Comments? Suggestions?SummaryMore learning materialNext class…ESD.70J Engineering Economy Module - Session 1 1ESD.70J Engineering EconomyFall 2009Session OneMichel-Alexandre Cardin – [email protected]. Richard de Neufville – [email protected] Engineering Economy Module - Session 1 2Today’s class outline1. Introduction2. Course outline and philosophy3. About Excel4. Session 1 – base case construction and sensitivity analysisESD.70J Engineering Economy Module - Session 1 3About this class•ESD.70 – Excel modeling •Learn enough Excel to: –Appreciate the power of Excel–Gain confidence in your own Excel modeling prowess –Prepare for ESD.71ESD.70J Engineering Economy Module - Session 1 4Course websitehttp://ardent.mit.edu/real_options/ROcse_Excel_latest/Excel_Class.html•All files posted on the web–Ask to transfer files manually if you cannot connectESD.70J Engineering Economy Module - Session 1 5•More about uncertainty and flexibility in ESD.71 – Engineering Systems Analysis for Design–ESD.70 provides necessary knowledge of Excel for ESD.71–Introduction of advanced Excel techniques•Want more?–ESD.72: Engineering Risk Analysis–ESD.712: Tools for Analysis: Design for Real Estate and Infrastructure Development–ESD.344: Real Options for Product and Systems Design–ESD.77: Multi-Disciplinary Systems Design OptimizationOther coursesESD.70J Engineering Economy Module - Session 1 6This class is :•Informal:–Please ask questions at any time - A question not asked is a waste of your tuition money! –Compare notes/help each other •Theoretically easy going:–Covering a few relevant theories – you DON’T have to learn theory to benefit from this class–Just learn how to use them in Excel•Take it for credit, or attend to learn/have fun•For credit – no exam – one final assignment!ESD.70J Engineering Economy Module - Session 1 7Course OutlineFour (4) recitation-style sessions:1. NPV, Data Tables, and Sensitivity Analysis – today 2. Monte Carlo simulations3. Modeling uncertainty using different stochastic models and probability distributions4. Analyzing the system in the context of flexibilityESD.70J Engineering Economy Module - Session 1 8Course Materials•Excel spreadsheets–ESD70session# –1.xls : setup before the class–ESD70session# –2.xls : reflects all the work done in class–Do the exercises with me  best way to learn•Cells marked as are for you to fill–Refer to the ESD70session# –2.xls to validate your work•Lectures in PDF on the webESD.70J Engineering Economy Module - Session 1 9Good Habits•Help each other: –Introduce yourself to your neighbors … now !–It’s late in the day and everyone is liable to tune-out intermittently. When you do :•Check with your neighbor to catch-up•Ask me – please do!•Look-up solutions in ESD70session# –2.xls file–Help your neighbor and he/she will help you•Better than Facebook to meet new people…ESD.70J Engineering Economy Module - Session 1 10Course Philosophy•Decision-making with an eye towards the future can be approached from two strategic directions:–Deterministic – improving forecast (and making the best decision based on the probabilities of the expected outcomes) –Dynamic – admitting that the forecast is likely to be wrong (recognizing uncertainty explicitly and the capacity to makes decisions along the way)•Exercises built around analyzing the case of “Big vs. Small”ESD.70J Engineering Economy Module - Session 1 11Human (in-)ability to forecastHeavier-than-air flying machines are impossible.Lord Kelvin – British Mathematician, Physicist, and President of the British Royal Society, c. 1895Everything that can be invented has been invented.Charles H. Duell – Commissioner of the U.S. Patent Office, 1899Reagan doesn’t have the presidential look.United Artists Executive – dismissing Ronald Reagan for the starring role in the movie of THE BEST MAN, 1964… weather … oil supply … stock market …ESD.70J Engineering Economy Module - Session 1 12Modeling with dynamic mentality•Cannot ignore the intrinsic uncertainty of the future  DYNAMIC mentality in decision-making to the rescue•Excel is a decent tool for decision analysis •We teach you how to unleash the power of Excel to model in a dynamic settingESD.70J Engineering Economy Module - Session 1 13Why Excel?•Seems too simple … •Why not something more exotic, like Matlab, C++, etc?•Excel is a LOT more POWERFUL than you think•Excel is ubiquitous•Excel forces you to build your models at a granular level – great for learning the nuts and bolts•Knowledge of Excel is assumed in ESD.71 and in many real-world modeling situations •Excel models are relatively easy to explain, understand and debugESD.70J Engineering Economy Module - Session 1 14Why not Excel•It will crash on you–Not if, but when… •Performance limitations•Certain functionality constraints–It will take you VERY far, but at some point you may need to get really seriousESD.70J Engineering Economy Module - Session 1 15Recommended versions•Class supported in Excel 2007 for PC, and Excel 2004 for Mac•Why?–Excel 2007 widely used on PC–Excel 2008 for Mac does not support Solver and other functionalities required for class•Make sure you have one of those installed!ESD.70J Engineering Economy Module - Session 1 16Session one – Big vs. Small•Objectives: –Good spreadsheet setup habits to facilitate Sensitivity Analysis–Charts–One-way/Two-way Data Tables–Goal SeekESD.70J Engineering Economy