Capital Budgeting

BUS422E Capital Budgeting

Spring 2019

Autumn 2019
  • Topics

    From certainty to uncertainty. Risk measures. Sensitivity analysis. Scenario analysis. Expected utility. Structuring decision. Decision trees. Value og information. Stochastic dynamic programming. Dominance. Portfolio perspective. Capital Asset Pricing Model. State preference model. Risk adjustment inside and outside of the market. Relevant risk. Use og market information. Option aspects at real investments. Capital rationing. Implication of capital structure on investment decisions. Investors¿ behavior in case of financial distress. 

  • Learning outcome

    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
    • be familiar with how optimization (linear and stochastic dynamic optimization) can be applied in investment decision making
    • understand  how capital rationing may affect investment decision making
    • understand 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
    • link project evaluation to capital market models (capital asset pricing model CAPM and state preference model SPM)
    • decide which analysis level that is the most appropriate with respect to relevant risk and target group
    • model and analyze investments when there are possibilities to adapt decisions as more information becomes available (using stochastic dynamic programming)
    • identify, model, analyze and, to a great extent, determine the value of real options
    • analyze investment choices when capital is limited
    • explain how financing can affect project values and how financial distress can create conflict between debt and equity holders
    • update on new research and knowledge within the field

    General competence - upon successful completion the student

    • 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 hand-in assignments. Student will get feedback on those and solutions will also be presented during lectures.

  • Required prerequisites

    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 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.

  • Assessment

    A 4-hour written school  exam. Counts 100 %

  • Grading Scale


  • Computer tools

    Microsoft Excel or similar

  • Literature

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


ECTS Credits
Teaching language

Autumn. Offered autumn 2019.

Course responsible

Associate Professor Malin Arve, Department of Business and Management Science.