Here are five areas of project finance models which always puzzle me:
1.Why are there so many copy paste iterative macros?
Is this because modellers think that the best answer to circularity is to write an inflexible macro to “solve” it?
Is this because it has become standard practice to make erroneous justifications for circulars?
How about working out why the circular is there, realising it is caused by an error and removing it.
2.Why is sensitivity analysis often undeveloped?
Is this because sometime models only have about three sensitivities which repeat hundreds of non-varying assumptions, rather than focussing on the key parameter to be tested?
Is this also because the model is full of time-consuming macros which need to run in a certain order to get some sort of result?
Is this because the modeller believes the base case in its entirety and knows exactly what, for example, the tax rate and working capital days will be in 30 years’ time?
3. Why are there so many IF functions in models?
Is this because the IF function is one of the first functions modellers learn? I must confess that my early models were made up almost entirely of these long-winded functions.
How about using neater solutions such as MIN / MAX or logical statements instead.
4. Why are so many formulae needlessly long and complicated?
Is this because modellers give themselves insufficient time to think?
Or are they merely distracted by phones and pop-ups?
Or are they impressed by complexity?
5. Why is there a lack of definition and precision?
Is this because modellers are in a hurry?
Do modellers think it doesn’t matter if they are not clear about the timing in their model?
Are they not concerned that they may be using an end inflation index erroneously and therefore overstating revenues?
Might they be using an an ending balance instead of a starting one? A very good way to introduce a circularity; go back to Point 1.
There are plenty more puzzling aspects to these models. More next month.