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Most of the time you'll use Excel to summarize existing data. If you're a manager or a project leader who needs to account for possible future scenarios, what the Excel team refers to as 'what-if' analysis, you have one of two options: First, you can create a worksheet for every combination of variables. The other easier way is to perform what-if analysis by creating scenarios. So why would you want to create a scenario? Well, a scenario is used when there's more than one possible future, in other words if you wanted to get a loan from a bank, you might not know what the interest rate is.
The interest rate would determine how much you can borrow, or at the very least your monthly payment, so you can build in scenarios, for example different loan amounts, different rates, different terms, and so on. So how do you create a scenario? Well, in Excel 2011, you go up to the Data tab on the Ribbon, and then in the Analysis group, click What-If, and then click Scenario Manager to display the Scenario Manager dialog box. This workbook already has two scenarios in it. I'll deal with those in a moment. But in this case what I want to do is create a scenario called long-term.
If you look back at the data in the worksheet, you'll see that I have a loan amount of 15 million, a term of 10 years, and an interest rate of 5.75%. Under those terms, the monthly payment would be $164,600. I like to bring that down, and one way that you can bring down your monthly payment is to pay the loan off over a longer period of time. You'll pay more interest, but again, the monthly payment will be lower. So, I'll create a scenario where I pay the loan off over a 25-year term. To create a new scenario, I will click Add, and I'll type in a scenario name.
I will call it LongTerm, and I'm going to change the value in cell B4. That's currently the 10-year payback. So I will just type in the reference for cell B4, and everything looks good. Click OK, and now I can type in the new value for the scenario. In this case, I want to try to pay it back over 25 years, and that's the only change I want to make, so I can click OK. If I wanted to create another scenario, I could click add.
I don't, so instead, I'll just click OK, and Excel created my scenario, but it didn't apply it yet. If I want to show that scenario, I can click LongTerm and then click the show button. When I do, Excel substitutes the value from the scenario into the worksheet, so now the term is 25 years, and my monthly payment is roughly half of what I was paying before. So once you apply a scenario, how do you get rid of it? Well, what you can do is click the close button to close the Scenario Manager dialog and then press Command+Z. There is no way to remove a scenario that's been applied from within the Scenario Manager dialog box, but you can do it once you come back here and press Command+Z, or click the Undo button on the toolbar. Okay.
So now let's go back in to the Scenario Manager and reapply the LongTerm scenario. You're not limited to applying scenarios one at a time. If I thought that there is a possibility I can get a lower interest rate on my loan, then I can apply the LowInterest scenario. To do that, I click LowInterest, click Show: the interest rate goes down to 5%, and my payment drops even lower. If you have two scenarios that affect the same cells, then the one that you apply later will be the one that is displayed within the worksheet.
So let's say, for example, that I thought that interest rates might be going up, and that I might have to deal with a high interest loan. If I want to apply that scenario, which will also affect cell B5, I can click Show. The interest rate goes up to 7%, which is a value I put into the scenario, and my payment goes up correspondingly. So now once you've created a scenario, let's suppose that you want to change it. You can do that by clicking the scenario you want to change. In this case, I'll change the LowInterest scenario, and click the Edit button.
When you do, you can change the scenario's name, change the cells that it applies to. In this case I want to do that, so I'll click OK, and I can now enter the value for each of the changing cells. For the low interest rate, let's say that I might be able to get a loan at 4.5%, and that is 0.045. That's my new value. Click OK, and now when I apply the LowInterest scenario by clicking Show, we get the rate of 4.5% and a payment of $83,000 and change.
If for any reason you want to get rid of this scenario, by deleting it, you can do that. So let's say that I want to delete the HighInterest scenario. I can click it and then click Delete. When I'm done with the Scenario Manager dialog box, I can click the close button, and it goes away. Scenarios help you manage your data when you need to account for several possible features, such as when you create the best, middle, or worst-case scenario. If you need to perform 'what-if' analysis, you'll find that scenarios will save you a lot of time and trouble.
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