Docencia \ Máster Universitario en Ingeniería del Software - European Master in Software Engineering

Software Engineering Economics

Class Information

Instructor: Prof. June Amillo. E-mail: amillo@fi.upm.es

Office Hours: by appointment. Office: 1317.

Class Hours: Monday 15:00-16:00 and Tuesday 15:00-17:00. Room: Artá.


Announcements

September 2, 2017 I won't be able to teach this course this semester due to an accident. Sorry for the inconvenience. Check with the Master's Program head for other alternatives.


Course Description

The goal of this course is twofold. Firstly, it introduces the basic concepts and techniques of financial analysis used to assess the economic value of a project. Secondly, it provides with the needed tools to make informed financial decisions on engineering projects. The course has a practical orientation and it is based on a collection of case studies drawn from real-world engineering situations with particular emphasis on those applications found in software engineering practice. The course starts studying the effect of the time value of money on a project cash-flow and continues with the different analytical techniques (Net Present Value, Internal Rate of Return, Cost/Benefit Ratios) used in project valuation. Special importance will be given to the generation of project cash flows and the effects that inflation, depreciation, taxes have on project's value. The course also includes some advanced topics: project financing, sensitivity analysis and the relationship between risk and return (the Capital Asset Pricing Model).

Prerequisites: None, but familiarity with Excel will help.

Credits: 6 ECTS.


Learning Outcomes

Upon successful completion of this course, students will be able to:

  • Understand and quantify the effect of the time value of money on project cash flows.
  • Apply discounting techniques to the valuation of loans, bonds and stocks.
  • Compute different figures of merit of a cash flow and make decisions about project acceptance or rejection.
  • Compare different alternatives based on quantitative methods, and choose the best alternative.
  • Perform break-even analysis and make decisions on building in-house or outsourcing.
  • Compute the economic life of an asset and make decisions on replacing the asset.
  • Generate project cash flows understanding what is relevant and what should not be considered.
  • Quantify the effects of inflation, depreciation and taxes.
  • Evaluate cash flows before taking into account the effects of the project financing mix.
  • Evaluate projects in a levered firm.
  • Estimate the Minimum Attractive Rate of Return.
  • Assess Project Risk.

Calendar

The following is a tentative schedule

  1. Compounding and discounting
  2. Understanding loans
  3. Nominal and effective interest rates
  4. Composite cash flows
  5. Inflation: constant vs actual money
  6. The value of bonds
  7. Stock valuation
  8. Project Analysis and figures of merit
  9. Net Present Value
  10. Mutually exclusive alternatives
  11. Equivalent Annual Value
  12. Economic life
  13. IRR and Incremental Analysis
  14. ROI and other Benefit/Cost ratios
  15. Genarating a cash flow
  16. Cash flows and inflation
  17. Effect of Depreciation and Taxes
  18. Equity Cash Flow
  19. Review case study
  20. Investment analysis in a levered firm
  21. Adjusted Present Value
  22. Project risk
  23. Sensitivity analysis
  24. Break-even analysis
  25. Estimating the Market Risk Premium
  26. Firm betas and the Cost of Equity
  27. Financial statements
  28. Financial ratios

Reading

Course Material

The core material for the course consists of

  • Software Engineering Economics Lecture Notes
  • Four sets of slide presentations
    1. The Time Value of Money
    2. Project Analysis
    3. CAPM
    4. Financial Statements
  • A collection of selected Case Studies
  • Excel solution worksheets

No textbook is required.

Reference

The following books are recommended for background reading

  • Return on Software, Steve Tockey, Addison-Wesley, 2005.
  • Making the software business case: Improvement by the numbers, Donald J. Reifer, Addison-Wesley, 2001.
  • Contemporary Engineering Economics, Chan S. Park, Addison-Wesley, 1997.
  • Engineering Economy, L.T. Blank & A.J. Tarquin, McGraw-Hill, 1998.

Grading

  • Completion of the case studies assigned in class: 70%. Final case study: 10%. Homework project assignment: 20%.
  • Regular class attendance is required.
  • Students are supposed to participate actively in the class discussions.
  • Teamwork in class or outside is encouraged but all work must be returned individually.