Capital Budgeting

BUS422N Capital Budgeting

Autumn 2023

  • Topics

    This course deals with company real investments in order to understand and make use of different approaches to calculate project values. They are in turn the basis for project decisions. The focus is on problems and basic models with a simple structure, however, they are at the same time rich enough to give important general knowledge.

    The uncertainty dimension is important in this course. First, the classic consumption decision in Fisher diagrams is dealt with. Next, the problem of budget restrictions are analyzed within the framework of a simple LP model. Furthermore, a number of different approaches related to the individual's evaluation of uncertainty at the project level are introduced. Projects are analyzed in a portfolio perspective and further linked to capital market models. An interesting question here is what is relevant risk. The relationship between uncertainty and decision flexibility is primarily discussed by describing and analyzing real options, but also by the case of gradually revealing uncertainty. The importance of capital structure for projects are dealt with by focusing specifically on how investment decisions are made in case of financial distress, and the course finally discusses traditional approaches to take care of project financing, both separately and included in the required rate of return.

  • Learning outcome

    Knowledge - upon successful completion the student

    •has a solid foundation for understanding theories connected to evaluation and choice of real investment under uncertainty. This includes utility theory, capital asset pricing model, state preference model and option pricing theory/models.

    •understands the importance of relevant risk and how this is included in the calculation of project values and the associated project decision.

    •understands how capital rationing and risk-reducing information may affect investment decision making.

    •understands how capital structure may influence project values and create conflicts between debt and equity holders.

    Skills - upon successful completion the student can

    •make investment decisions when capital is limited.

    •analyze projects in order to assess and evaluate uncertainty at both project and portfolio level.

    •evaluate projects using models when total risk is relevant and when only part of the risk is relevant.

    •take flexibility into account by identifying, analyzing and calculating value of real options, as well as adjusting decisions when uncertainty is gradually revealed.

    •value financing effects for projects and explain how the financial situation of a company may create conflicts between various stakeholders as well as calculate the consequence of the related investment decisions.

    General competence - upon successful completion the student

    •is able to evaluate and deal with real investments in a number of different organizations in a sound manner.

    •is able to ask critical questions and contribute in a constructive way to organizations working with real investments.

  • Teaching

    Regular lectures where theories, methods and examples are presented. There will be exercises associated with each topic (lecture) and it is expected that student work with these between lectures. There will be time available during lectures to discuss solutions to these exercises if needed. During the course there will be two compulsory assignments. Solutions will also be presented to the students. Oracle service will be given at the end of the semester.

  • Recommended prerequisites

    It is recommended that students have knowledge equivalent to bachelor level courses in capital budgeting and finance, microeconomics, linear programming, mathematics and statistics.

  • Credit reduction due to overlap

    BUS422E Capital Budgeting (and BUS422 Investeringsanalyse)

  • Compulsory Activity

    There will be two compulsory assignments with a set of problems in each assignment. It is allowed to work in groups of maximum three people to solve the problems (sole authored hand-ins are also accepted).

    Grading scale is Approved - Not approved. Approved is required on both assignments in order to be eligible for the exam.

    Note: There might be mandatory activities in the course before the deadline for course registration.

  • Assessment

    4-hour written individual school exam. Counts 100%.

  • Grading Scale

    A - F

  • Literature

    A collection of articles and extracts form books and research reports.


ECTS Credits
Teaching language

Spring. Offered Spring 2023.

Course responsible

Professor Øystein Gjerde, Department of Business and Management Science

Assistant Professor Andreas Ørpetveit, Department of Business and Management Science