Abstract

A graduate level advanced engineering economics class taught at California Polytechnic State University, San Luis Obispo, includes a thorough review of time value of money, investment evaluation, inflation, risk and return, financing decisions, corporate investment strategies, risk analysis and decisions incorporating non-monetary considerations. Historically this course was taught using an advanced text where the topics were covered sequentially. A redesign of the course now includes the construction of a stock price prediction model for a company of the student’s choice. Through the model, the topics are covered and discussed in the context of the large model-building project. For instance, inflation is discussed when students collect historic data on the company’s performance and use that data to forecast into the future. Issues of discount rate and variability in inflation become evident as students wrestle with the past and the future. The concepts of risk, return and the capital asset pricing model are introduced as students begin to understand how the required return for equity holders is not only dependent on the underlying risk of the assets, but on the leverage of the firm. Given varying levels of debt, the relative stability of the required return on the assets (as opposed to the equity) emerges as a better analysis tool.

Disciplines

Industrial Engineering | Manufacturing

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URL: http://digitalcommons.calpoly.edu/ime_fac/84