Instructor: Prof. June Amillo. E-mail: firstname.lastname@example.org
Office Hours: by appointment. Office: 1317.
Class Hours: Thursday 19:00-21:00. Room: Artá.
January 25, 2018 Classes will start on February 8
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).
: None, but familiarity with Excel will help.
: 6 ECTS.
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.
The following is a tentative schedule
- Compounding and discounting
- Understanding loans
- Nominal and effective interest rates
- Composite cash flows
- Inflation: constant vs actual money
- The value of bonds
- Stock valuation
- Project Analysis and figures of merit
- Net Present Value
- Mutually exclusive alternatives
- Equivalent Annual Value
- Economic life
- IRR and Incremental Analysis
- ROI and other Benefit/Cost ratios
- Generating a cash flow
- Cash flows and inflation
- Effect of Depreciation and Taxes
- Equity Cash Flow
- Review case study
- Investment analysis in a levered firm
- Adjusted Present Value
- Project risk
- Sensitivity analysis
- Break-even analysis
- Estimating the Market Risk Premium
- Firm betas and the Cost of Equity
- Financial statements
- Financial ratios
The core material for the course consists of
- Software Engineering Economics Lecture Notes
- Four sets of slide presentations
- The Time Value of Money
- Project Analysis
- Financial Statements
- A collection of selected Case Studies
- Excel solution worksheets
No textbook is required.
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.
- 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.