EC55C6: INVESTMENT ANALYSIS FOR ENERGY (2024-2025)

The course is divided into four comprehensive sections, each focusing on a key aspect of investment decision-making and corporate finance.

1. Time Value of Money and Decision-Making:

The first section introduces the concept of the time value of money, a cornerstone of financial theory. Students explore how firms evaluate trade-offs over time when making investment decisions. Investments usually require immediate costs for future benefits, which may vary in amount and timing. For example, a firm might face a choice between investing now to receive £5 million in five years or £10 million in eight years. This section teaches students how to evaluate such options by understanding the present value of future cash flows. The ability to discount future benefits to their present value is critical for making informed investment decisions, particularly in the energy sector where long-term investments are common.

2. Decision Rules for Investment Comparison:

In the second section, students delve into the decision-making rules that firms use to compare and evaluate various investment opportunities. The course places a strong emphasis on net present value (NPV), which is essential for determining the profitability of an investment by discounting future cash flows to their present value. Additionally, students will explore other important decision criteria such as the internal rate of return (IRR) and the payback period. This section provides a robust analytical framework that equips students with the tools needed to assess the financial viability of multiple projects. By the end of this section, students will be proficient in using these tools to make well-informed investment decisions.

3. Practical Workshops on Financial Analysis:

The third section consists of practical workshops designed to enhance students’ technical skills in financial analysis. These workshops focus on constructing and using Excel spreadsheets to model and analyze investment projects. The hands-on experience gained in these workshops allows students to apply the theoretical knowledge from the previous sections to real-world scenarios. This practical approach is particularly valuable for students aiming to work in industries where financial modeling and project analysis are integral to the decision-making process.

4. Risk Assessment in Investment Decisions:

The final section addresses the critical issue of risk in investment decision-making. Risk is an inherent part of any investment, and understanding how to measure and manage it is essential for making sound financial decisions. In this section, students will explore various methods of quantifying risk, the costs associated with risk mitigation, and how to incorporate risk assessments into decision-making frameworks like NPV and IRR. The course also covers how to determine the level of risk a firm should be willing to accept and the strategies available to manage that risk. This section is particularly relevant to the energy industry, where investments are often large-scale and involve significant uncertainty.

Learning Outcomes

By the end of the course, students will have developed a thorough understanding of the theoretical foundations of corporate finance, including key concepts such as present value, opportunity cost of capital, and the risk-return trade-off. They will also gain practical skills in investment analysis, enabling them to approach corporate finance challenges with a logical, rigorous, and methodical mindset. Additionally, the course aims to enhance students’ intellectual understanding of how companies make financing decisions and how these decisions interact with financial markets.

The course also emphasizes the development of essential professional skills, including communication, problem-solving, and time management. These skills are critical for success in the fast-paced world of corporate finance, where the ability to analyze complex situations and make quick, informed decisions can significantly impact a firm’s success.

In summary, this course offers a well-rounded education in investment decision-making, with a particular focus on the energy industry. It combines theoretical insights with practical applications, preparing students to excel in various roles within finance, economics, and management. The knowledge and skills gained from this course will be invaluable for those looking to make a significant impact in the field of corporate finance.