II.a Economics and Financial Evaluation

Learn the meaning, uses and implementation of core concepts and criteria in economics, finance, and the evaluation of investment projects.
Master calculations relating to growth, annuities, discounting, interest compounding and loan repayments.
Gain a solid knowledge of ratio analysis.

Overview. This course begins by covering the core concepts, criteria and calculations that are required in general economic modelling, financial forecasting, investment evaluation, and general decision support. These include growth calculations, interest types and compounding, discounting, annuities, the internal-rate-of-return, net present values, loan repayments, and depreciation calculations.
Practical work and exercises. Students are required to conduct numerous hands-on modelling exercises and can also follow along by replicating other examples that are shown in the text.
Assessment tests. There are several assessment tests which test the key economic and financial concepts and require one to do practical exercises in Excel, such as building simple models and running sensitivity analysis on the results.

Growth formulae and present values. Measuring growth. Classical and logarithmic measures. Growth calculations. Inflating and discounting. Time-period conversions.
Interest rates and calculations. Time-value of money. Bond yield. Yield curve. Risk premia. Interest compounding methods and formulas. Links between interest compounding and model time periods. Accruals. Bootstrapping. Yield curves.
Cost of capital, risk and return. Risk and return. Portfolio effects. Correlation and diversification. Markowitz theory. Capital Asset Pricing Model. Introduction to the cost of equity.
Annuities and discounting. Discounted cash flow. Annuity formulas. Terminal value calculations. Capitalization rates.
Economic evaluation. Breakeven, time to breakeven, cumulative breakeven, discounted breakeven. Calculation of returns. Internal rate of return (IRR). Uses and limitations. Discounted cash flow, net present value (NPV). Comparison of IRR with NPV.
Loans and mortgages. Payback amounts and periods. Capital versus interest. Implied interest rates.
Depreciation and amortization. Methods and calculation approaches. Physical and financial assets.

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Core concepts and calculations in economics and finance: growth, interest compounding, discounting, annuities, IRR, NPV, loans, and ratio analysis.