There are some charts that look so stunning and yet confusing. You cant make up your mind whether it tells a compelling story or it is just plain wrong.
Today, let me present you one such chart. I call this Pie of a Pie of a Pie chart (source: thiswoo, thanks to Nassar, our forum member for mentioning this)
Pie of pie of pie – What is good about it?
The idea of this chart is quite noble. Show how the water in this world is distributed. Obviously, with such large numbers, making one chart would be difficult. So make 3. The initial pie of salt vs. fresh water, which explodes to show the distribution of fresh water which explodes to show the spread of other water sources.
The chart narrates the story of how little water is available for consumption and where it is one simple picture.
And the pie leaking in to another pie metaphor works really well in this case.
What is not good about it?
To begin with, the 3D pies are very deceptive. It is not clear how much % of water is fresh water (other than the fact that it is very little). Also, compared to a 2d pie, the fresh water slice in 3d pie looks bigger (due to its orientation and 3d effects).
Then, no matter how good the colors are, the 2nd and 3rd pies are confusing. The colors imply that the blue slice (fresh water) corresponds to just ice caps and glaciers.
Since all 3 pies are of similar sizes, we immediately think that we have enough water. Only on closer inspection it becomes obvious that the size of lower pies has no relation to actual water amount (only angles convey the information).
Finally, I think this chart is bad because it takes excessively large amount of time to make in almost any software. That said, it is a good exercise to come up with this tinkering with various drawing shapes etc.
Aren’t there any alternatives?
The easiest and clear (and obviously not so exciting as pie of pie of pie chart) alternative is to just show the numbers like this:
Note: This table too is misleading as row heights wrongly indicate that we have more fresh water than salt water etc.
The next option is to use a variation of bar of bars, some thing like this:
One more option I can think of is a tree map. For hierarchical data like this Treemaps are also a very good option. That said, since the largest value is 390,000 times the smallest value, any treemap will be very large to show the smallest value clearly.
Do you like Pie of Pie of Pie chart?
What do you think? Do you love this or would you prefer some other chart to visualize this data? Share your opinion using comments.
Previously on Pie Charts
Pie charts are one of the most (mis)used charts in business world these days. That is why we talk about them from time to time. See these articles to learn more:
- An example where pie charts work well
- Alternatives to Pie charts
- Group smaller slices in pie charts to improve readability
- Do not make pie charts like these
PS: If you want to know to create this pie of pie of pie chart in excel, see here.
15 Responses to “Modeling Interest During Construction (IDC) – Excel Project Finance”
Thanks again for a very helpful post.
I had a similar problem when trying to model a balance sheet and profit and loss projection. The problem was that interest expense (in P&L) was dependent on a cash shortfall (in BS) which had to be funded. The cash shortfall depended on how much interest was paid, so the mutual dependency made a circular reference.
I addressed it with a macro that calculated interest outside of the P&L, then pasted the calculated amount into the P&L as a value. The model was out of balance, but by repeating the pasting and calculating loop the imbalance reduced to zero. It was a bit messy, and had to be repeated every time a line changed - but it worked.
If I have to do it again I'll read this article again first and see if it can be done more elegantly.
Hi,
The use of a circular reference can be avoided in this case. Just make use of the geometric sum to calculate the interest required. I’ll walk through the example from the spreadsheet.
First calculate the cash needed each year without the interest expense. So you year 1 you need 55 Mn, year 2 105 Mn, and 190 Mn for year 3. The total amount to borrow for year 1 is then (50 Mn)/(1-interest_rate) = (50)/(1-0.1). For years 2 and subsequent the amount borrowed is the cash needed in that year plus the interest_rate times the amount already borrowed. For year 2 (105 + interest_rate * sum(previous debt raised))/(1-interest_rate)=(105+0.1*61.1)/(1-0.1).
This process avoids the need for a circular reference, and makes the calculation more stable.
Thanks,
Tristan
The question is for the year 1 in your case, the amount works out to 45 mn. However in the year 2 you have applied the loan amount as 61.1 mn.
Am I missing something ! Please help !
very helpful information!!!
using circular references and to make model more stable we can use combination of "IF" and "ISERROR" functions. i.e
=if(iserror(formula1),"",(formula1))
this formula will return blank value if there is any error otherwise give the result required.
I usually use this in my models and it makes them very stable......
🙂 🙂 🙂
@Terry: Thats right. Exactly same problem is seen in Interest - Cash cycle in P&L and Cash Flow statement as well. In our trainings on financial modeling in excel, we demonstrate using both the circular loops as well as the macros to take care of this problem. Circular loops have their own pitfalls. If the model enters into a state of error, the error percolates!
@Tristan: Thanks for pointing out. I agree with you that if circular loops can be avoided, they should be avoided.
@Yogesh: This is one way of avoiding the problem. Although circular loops have another problem that they make your sheet slower. Each time, there is a change in the sheet, all the calculations are redone. So if they can be avoided, they should be avoided.
Please note that this was an example (a large one indeed) and I didn't have space to speak about the pitfalls of this approach! I just wanted to illustrate an approach and am glad that some of you found it useful!
I think while posting, there is an error in the images! The last image should be flipped with the one that is posted in step VII!
I think you can try the following simple solution given by Microsoft itself to make the circular works:
Windows: Excel Options -> Formulas -> Put a tick on "Enable iterative calculation"
Mac: Excel -> Preference -> Calculation ->Put a tick on "Limit iteration"
You can change the maximum number of calculation iterations as well as the maximum changes which iteration stops for goal seeking or for resolving circular references based on the number you type in the maximum change box.
Thank you.
Hey All
I heard that we can take care of the circularity with the help of macro for IDC. Can anybody help on the steps to construct the macro for the same.
Regards
Vinay
Hi Vinay,
If you look closely, you are essentially copying the values from the interest calculation to the IDC in project cost.
Basically you can record a macro, that takes the values from interest and pastes special the values in IDC row in project cost.
Then you can run that recorded code in a for loop.
Hope this helps.
Thanks Param for reply.
But before calculating interest, i need to provide for Upfront Equity and Equity, which are essentially part of total project cost. Hence, i need to put in Upfront Equity and Equity to calculate the IDC which is again hitting the total project cost.
Bit of confused on how to remove this circular reference.
Regards
Vinay
Wow, this was a brilliantly simple post. I was looking online for a while before I found this page. Never seen this been explained so beautifully yet so crisply before. Thanks for saving my ass at work! (i'm relatively new to finance + modeling)
I'm not sure why but this web site is loading very slow for
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[…] Project Finance Modeling using Excel – Part 1 & Part 2 […]
I have been reading your blog since my college days. Today, I'm writing just to say thanks.
We have calculated Financial Rate of return of a hydropower projects, and the observer has raised an observation regarding Total Project cost with IDC Rs. 8616.01 million (PKR) and with-out IDC 8352.46 million (PKR). How does the Financial nalysis be calculated on the basis of with-out IDC Or With IDC?????
Please helpf. if possible to spare some time.