GIA400: PROJECT PROFITABILITY ANALYSIS

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Course outline

Financing and cost of capital Financing methods: borrowings (debt), bonds, equity, common stock, preferred stock. Capital structure, after-tax cost of debt, estimated cost of equity: dividend model, capital asset pricing model (CAPM), weighted average cost of capital, minimum acceptable rate of return.

Analysis of independent projects. Discounted payback period. Equivalent present value (net present value), equivalent future value, equivalent annual value, internal rate of return, modified internal rate of return.

Analysis of mutually exclusive projects. Total investment method: equivalent present values and equivalent annual values. Differential analysis method. Unequal project analysis period and lifetime, unknown analysis period, unlimited lifetime. Equivalent unit cost, buy or make decision, design economics, replacement analysis.

Depreciation and after-tax profitability analysis. Depreciable assets, depreciable property, depreciable cost, book depreciation, straight-line method, accelerated depreciation methods, proportional depreciation, book value, residual value, salvage value. Tax depreciation, capital cost allowance, half-year rule, asset classes, open class, closed class. Corporate income tax, taxable income, tax effect of disposal, operating loss carryforwards, capital loss carryforwards. Development of after-tax project cash flow for present value equivalent and rate of return calculations. Partly debt-financed projects, projects requiring investment in working capital.

Risk and uncertainty. Sensitivity analysis, economic break-even point, scenarios. Analysis of the statistical distribution of the equivalent present value: expected value, standard deviation. Comparison of projects with different risks. Sequential decisions and the value of information.

Real options and strategic equivalent present value. Black-Scholes model, deferral option, patent license option, production scale-up option, maximum R&D project budget.