Capital Budgeting

BUS422E Capital Budgeting

Autumn 2024

  • Topics

    Capital budgeting is the process that companies use to decide which long-term investment projects they should undertake. These projects can be anything from investing in R&D or in new technology to expanding assets owned by a company. Capital budgeting involves analyzing the costs and benefits of these projects to determine their potential profitability and whether they are worth the investment for maximum growth, and that is what this course is about.

    The course will begin by introducing students to the concept of capital budgeting and its importance in strategic decision-making. The course will then cover various techniques for evaluating capital investment projects, such as net present value (NPV), internal rate of return (IRR), payback period, and profitability index. Throughout the course, students will explore the assumptions, limitations, and applicability of different capital budgeting techniques, as well as their strengths and weaknesses.

    The uncertainty dimension is important in this course. An interesting question here is what is relevant risk. Students will learn how to incorporate risk and uncertainty into capital budgeting decisions, and how to use risk-adjusted discount rates and other methods to adjust for risk.

    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


    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.


    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

    Physical meetings. Theories, methods and examples will be presented. There will be exercises associated with each topic (lecture) and students are expected to work with these exercises between lectures. There will be time available during lectures to present solutions to some of them. There is one compulsory assignment. 

  • Recommended prerequisites

    Nothing more than the knowledge students have acquired in bachelor courses within capital budgeting, finance, microeconomics, linear programming, and statistics.

  • Credit reduction due to overlap

    BUS422 / BUS422N Investeringsanalyse.

  • Compulsory Activity

    There will be one compulsory assignment with a set of problems. 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 in order to be allowed to take the exam.

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

    Compulsory activities (work requirements) from BUS422N is valid for BUS422E.

  • Assessment

    4 hours written school exam (pen and paper). The answers have to be written in English.

  • Grading Scale

    A - F.

  • Computer tools

    No particular requirements.

  • Literature

    A compendium consisting of a collection of articles and excerpts from books and reports.

  • Permitted Support Material


    One bilingual dictionary (Category I) 

    All in accordance with Supplementary provisions to the Regulations for Full-time Study Programmes at the Norwegian School of Economics Ch.4 Permitted support material and  


ECTS Credits
Teaching language

Autumn. Offered autumn 2024

Course responsible

Assistant Professor Aysil Emirmahmutoglu, Department of Business and Management Science (Main course responsible).

Professor Øystein Gjerde, Department of Business and Management Science.