Investment Analysis

Recommended Prerequisites

Basic mathematical analysis.

Practical skills in Microsoft Excel

Teaching Methods

The expository method will be used in order to introduce the basic concepts and the relevant models. Students will be encouraged to actively participate in the discussion of some examples that illustrate the theoretical concepts, allowing them to gain a deeper knowledge of the subjects and developing their critical thinking. From these simpler examples, we will the go on to some more complex cases, which will be handled with the help of computational tools. The contact time will be evenly split between common classrooms and computer labs.

Learning Outcomes

Objectives

To introduce the concept of investment value, taking risk into account and considering both the financial and the socio-economic perspectives.

Specific objectives

- to understand the classic project evaluation methodologies as well as their limitations;

- to incorporate the impact of taxes and financing decisions in the investment value;

- to assess the impact of risk in the evaluation results;

- to determine the best decisions to be made in response to uncertain events;

- to be able to use quantitative and computational tools for project evaluation;

- to understand the underlying principles of socio-economic appraisal of investment projects.

Generic competencies

Cognitive, methodological and technological.

Specific competencies

- to analyse investment opportunities;

- to critically interpret the results of the application of different methodologies and computational tools.

Work Placement(s)

No

Syllabus

The concept of present value and its calculation.

Foundations of the net present value method.

Compounding intervals.

Other indicators of the financial performance: payback; internal rate of return; accounting rate of return; profitability index.

The choice of investments when resources are limited – capital rationing models.

The definition of cash flow and its calculation.

Equivalent annual cost.

Corporate and project financing: financial leverage; financial risk and expected return; taxes on individuals and corporations and their impact in the project value; costs of financial distress; after-tax weighted average cost of capital.

The adjusted present value and its calculation.

Risk analysis: sensitivity, scenario and break-even analysis; Monte Carlo simulation.

Decision trees and the binomial model for real options analysis.

The basics of cost-benefit analysis.

Head Lecturer(s)

João Paulo Faria Oliveira Costa

Assessment Methods

Final Assessment
Exam: 100.0%

Continuous Assessment
Test (40%), computational component (60 %).: 100.0%

Bibliography

BREALEY, Richard A. ; MYERS, Stewart C. ; ALLEN, Franklin - Princípios de finanças empresariais. 8ª ed.. Madrid : Graw-Hill Interamericana de España, 2007. [BP 658.15 BRE]

COPELAND, Tom ; ANTIKAROV, Vladimir - Real options : a practitioner’s guide. Updated [ed.]. New York : Thomson/Texere, 2003. [BP 336.07 COP]

EU. Comissão Europeia — Manual de análise de custos e benefícios dos projetos de investimento : fundos estruturais - FEDER, Fundo de Coesão e ISPA 2003. [Consult. 13 Jun. 2013]. [Em linha]. Comissão Europeia, 2003. Disponível em WWW: <URL: http://ec.europa.eu/regional_policy/sources/docgener/guides/cost/guide02_pt.pdf>.

TRIGEORGIS, Lenos - Real options : managerial flexibility and strategy in resource allocation. Cambridge, Mass. : MIT Press, 1996. [BP 336.07 TRI]

WINSTON, Wayne L. - Simulation modeling using risk. Belmont : Duxbury Press, 1996. [BP 519.6 WIN]

ZERBE, Richard ; BELLAS, Allen - A primer for benefit-cost analysis. Cheltenham : Edward Elgar, 2006. [BP 519.8 ZER]