BUS332 Decision Analysis and Capital Budgeting

From certainty to uncertainty, Risk measures, Sensitivity analysis, Scenario analysis, Expected utility, Structuring of decisions, Decision trees, Decision criteria, Value of information, Subjective probabilities, Stochastic dynamic programming (focus on applications within the course), Multi-attribute decision making, Dominance, Portfolio perspective, CAPM, State preference model, Risk adjustment inside and outside the market, Relevant risk, Use of market information, Option aspects of real investments, Implications of capital structure, Investment behavior in case of financial distress. Human cognitive aspects of decision making.

The course deals with decision analysis and real investment in companies and under uncertainty. The course will have a predominance of theory and the main part of the course deals with understanding and using different approaches to analyse and model decisions under uncertainty. This also includes calculating present values of projects with real options. This will at a later stage be used in decision making. A number of stylized problems and models with a simple structure, but still with important general results, are used.

Knowledge - upon successful completion the student

• will have an extensive understanding of theories connected to evaluation and choice of projects and 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

• 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

• be able to ask critical questions and contribute in a constructive way to organizations working with projects and real investments.