Prerequisites
Graduate standing or an undergraduate course on probability and/or statistics. Typical courses include, but are not limited to, ME EN 2550, CS3130, ECE3530, or MATH 3070
Student Learning Objectives
Upon successful completion of this course, students shall be able to:
- Understand the time value of money.
- Evaluate alternatives according to present worth, annual worth, future worth, internal rate of return, external rate of returns, and benefit to cost ratios.
- Calculate the impact of taxes upon the cash flows.
- Perform sensitivity analysis.
- Evaluate random cash flows.
- Simulate random cash flows (graduate students only)
- Perform decision analysis and implement decision trees
- Utilize these financial skills and decision tools to make informed decisions.
Course Description
This course focuses on financial decision making for both industry and individuals. Topics covered include: time value of money, loans, present worth analysis, rates of return, benefit to cost ratio, taxes, probabilistic cash flows, simulation of cash flows, decision analysis and decision trees.
Sample Lectures
A primary focus of the class is determining present worth of various options. Microsoft Excel is used to determine these values. In this lecture, an Excel sheet is created to compare the present worth of two different machines. Thereby enabling a person to evaluate which machine has the higher present worth and make a recommendation.
Decision trees are a useful tool to evaluate decisions. This lecture builds a decision tree of a wildcatter. A wildcatter owns land and needs to decide whether or not to drill for oil. The wildcatter could strike black gold, hit medium or low amounts of crude oil or be dry. The decision tree is built. Several additional lectures use Bayesian analysis to calculate probabilities and determine the optimal decision. Additional lectures cover the expected value of/with perfect/sample information.