BUS422E Capital Budgeting
Spring 2020Autumn 2020
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. We will look at real investments in terms of individual decisions, a portfolio perspective, real options and financial issues.
Knowledge - upon successful completion the student
- will have an extensive understanding of 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.
- 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 uncertainty may affect investment decision making
- understands how capital structure may influence project values and create conflicts between debt and equity holders.
Skill - upon successful completion the student can
- analyze projects where uncertainty is thoroughly evaluated, and quantified.
- evaluate uncertainty at project and portfolio level
- decide which analysis level that is the most appropriate with respect to relevant risk and target group
- take flexibility into account by identifying, analyzing and calculating value of real options, as well as adjusting decisions when uncertainty is gradually revealed.
- identify, model, analyze and, to a great extent, determine the value of real options
- analyze investment choices when capital is limited
- make investment decisions in case of restricted amount of capital.
- 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 associated 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.
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 one or two hand-in assignments. Solutions will also be presented to the students.
It is expected that students have knowledge equivalent to bachelor level courses in capital budgeting and finance, microeconomics, linear programming and statistics.
It is expected that students have knowledge equivalent to bachelor level courses in investment and finance, micro economics, operations research (linear programming), and statistics.
Credit reduction due to overlap
BUS422 / BUS422N Investeringsanalyse.
Requirements for course approval
There will be one or two written hand-in assignments with a set of problems in each assignment. It is allowed to work in groups to solve the problems. Grading scale is Approved - Not approved. Approved is required in order to be allowed to do the final exam.
Note: There might be mandatory activities in the course before the deadline for course registration.
Course approval from BUS422N is valid for BUS422E.
4-hour written school exam.
Microsoft Excel or similar
A compendium consisting of a collection of articles and excerpts from books and reports.
- ECTS Credits
- Teaching language
Autumn. Not offered autumn 2019.
BUS422E has been cancelled for the autumn of 2019.
Associate Professor Malin Arve, Department of Business and Management Science.