Assume it is late in Year 1 of a three-year period, and you are trying to build a model of a company's net income (profit) and cash flow for Years 2 and 3. The problem is to forecast net income and cash flow in those years. The company is likely to use the forecasts to make decisions, so the estimates should be as accurate as you can make them. After researching the problem, you decide that the estimates should be based on three factors: (1) Year 1 results, (2) estimates of the underlying economic variables, and (3) the cost of products the company sells.

Your model will use an income statement and cash flow framework. The user can enter values for two pos-sible states of the economy in Years 2 and 3: an O for an optimistic outlook or a P for a pessimistic outlook. The state of the economy is expected to affect the number of units the company can sell as well as each unit's selling price. In a good (optimistic) economy, more units can be sold at a higher price. The user can also enter values into your model to see two possible trends in the cost of goods sold: U for up or D for down. A U means that the cost of an item sold will be higher than it was in Year 1; a D means that the cost will be less.Presumably, the company will do better in a good economy and with lower input costsbut how much better? The user can play "what if" with the input variables and note the effect on net income and year-end