Goal seek is one of the most powerful tools in Excel. It can be useful in a wide range of situations.
This guide will show you how to get the best from goal seek and present some tips to make our lives easier while working with it.
This guide assumes that you know a bit about how goal seek works.
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4. Goal seek is one of the most powerful tools in Excel. It can be
useful in a wide range of situations.
This guide will show you how to get the best from goal seek and
present some tips to make our lives easier while working with it.
This guide assumes that you know a bit about how goal seek
works. If you don’t, check out this guide from Microsoft or this
useful overview.
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GOAL SEEK
Taming the
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USING GOAL SEEK
In this scenario, you have a fixed initial outflow of USD 100,000 and you have to find the
fixed quarterly inflow over a fixed time period that will yield an annualized return of 12.00%.
Let’s also start with an assumption of USD 10,000 for the periodic inflows (you can start with
any number since the goal seek is going to change it). Keep in mind that a very small
number will result in a #NUM! error. It is best to start with a number big enough to let Excel
calculate an internal rate of return using the IRR function.
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USING GOAL SEEK – TIP NO. 1
Create a check to highlight when the target IRR is not met
Once you have the basic logic developed to calculate the required output, it is important to
see if the current assumptions are resulting in the required output or not. This can be
achieved by creating a check which monitors the difference between the calculated and
target results – and can highlight if you are not achieving your target.
Remember that Excel calculates to 15 significant figures, and there are likely to be minor
differences. You should not expect – and therefore not check – for the difference to be a
perfect zero.
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TIP NO. 1 (CONTINUED)
To deal with this issue, you can set up an input for an appropriate tolerance level. Write the
formula so that if the difference is greater than the tolerance then it should show that as an
error.
If you use a simple A > B for this check, then the formula won’t flag an error where the
difference is negative. Use the ABS function to test for the absolute difference between the
calculated difference and the tolerance. 1
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USING GOAL SEEK – TIP NO. 2
However, in many cases
goal seek will not be
able to find a solution.
The reason for this lies
in the method that goal
seek uses to find a
solution. We will
consider that next.
Do not goal seek on the
check
It can be tempting to set
up the goal seek to get the
check to go to zero.
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TIP NO. 2 (CONTINUED)
When searching for a
solution, Excel needs to
know if the options it is
trying are going in the
right direction and
getting closer to – or
further away from – the
target.
If you run a goal seek on
the check, Excel will not
be able to determine if it
is going in the right
direction because of the
ABS function.
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USING GOAL SEEK – TIP NO. 3
Do not goal seek on ABS difference.
It is good to use absolute numbers for checking purposes or to show the difference from
presentational point of view. It is not a good idea to target the absolute of the difference for
the Goal Seek.
This is for the same reason that we didn’t goal seek on the check. If you use Goal Seek to
target an absolute difference, as it iterates it may not be able to establish if its attempts are
taking it in the right direction to find a solution.
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TIP NO. 4 (CONTINUED)
You should not set your expectations too high on this precision – sometimes if you seek too
precise an output (by using a very high multiplier on the difference), goal seek might not be
able to find a solution and will then change its direction of guesses. This may lead to a
situation where goal seek is unable to generate a result.
To solve this issue, you need
to amplify the output on
which you set the goal seek.
When the goal seek finds a
solution, you will have a
more precise result than with
the non-amplified output.
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USING GOAL SEEK – TIP NO. 5
Help Excel – start with an intelligent guess
Since the goal seek works on guesses, you can help it by providing a good start position.
This will not only help you increase your chances of getting a result from goal seek, but will
also reduce the number of iterations required to find a target value.
This can be important if you are working on a big financial model which has several goal
seeks and might take time to recalculate.
Start with a number that does not result in an error on the target output cell – otherwise goal
seek will not be able to start.
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USING GOAL SEEK – TIP NO. 6
Create a macro to run a goal seek more easily and quickly
It is always a good practice to keep your inputs in one place (we use the InpC sheet in the
file attached).
Note that in the current example the periodic inflows inputs are on the calculation sheet
itself. I did this because I was building up the calculation and testing the goal seek. It made
it easy for me to work with everything in one place.
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TIP NO. 6 (CONTINUED)
I would not leave a file like this. Instead, I would
relocate the inputs to the input sheet and create a
simple macro to perform the Goal Seek.
If you need help with relocating inputs, click the
image to the right to see the guide on relocating
inputs.
This macro can then be assigned to a button,
which can be placed wherever the user finds it to
be most useful (e.g. right next to the ‘Annualised
vs target IRR – Check’).
This will not only make sure that you are following
the good practice of modelling, but will also make
it easy to get the required result with a single click.
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