PETROLEUM AND mINERAL ENGINEERING (PME) 500
Energy and Mineral Project Investment Evaluation

Instructor:
Professor Timothy J. Considine
Department of Energy & Mineral Engineering
125 Hosler Building
Phone: (814) 863-0801, Email: cpw@psu.edu
Office Hours: Monday-Wednesday-Friday 3-5pm & by appointment

OBJECTIVE

The goal of this course is to introduce students to traditional engineering cost methodologies to evaluate investments in energy and mineral projects and to modern techniques for making these decisions under uncertainty. The later objective is motivated by the importance of technical, political, and economic risk facing minerals industries.

OVERVIEW OF COURSE

After an introduction to the basic problems facing investment decisions in energy and minerals industries, the course presents the classic tools of investment evaluation including net present value and internal rate of return in a variety of contexts both before and after tax. Relevant aspects of financial accounting will be introduced when necessary. The third major section examines the nature and properties of risk and how financial managers measure, mitigate risk, and incorporate risk into investment decision criteria. The final section develops two approaches to investment decision making under uncertainty. The first involves decision trees and stochastic simulation, using probability distributions for key parameters in the engineering cash flow model. The second approach involves the application of option valuation models to estimate the value of so-called real options to follow-up, delay, or abandon a project. These options often face managers and engineers in complex energy and mineral projects.

PRE-REQUISITES

Econ 002 or ENNEC 100, Concurrent: PNG 405 or graduate standing and good quantitative skills.

ACADEMIC INTEGRITY

This course adopts the College's academic integrity policy, which can be found at
http://www.ems.psu.edu/students/integrity/statement.html.

ASSIGNMENTS AND GRADING

Your grade will be determined by your performance on individual assignments, which will comprise half the grade, and performance on a mid-term and final examination that will comprise the remaining half.

READING LIST AND COURSE OUTLINE

Part I. Introduction

A.  Energy & Mineral Commodity Market Economics & Investment Decision Making

Mian, M.A. (2002) Project Economics and Decision Analysis, Volume I, Chapter 1.
Brealey, S.C. & R.A. Myers (2003) Principles of Corporate Finance, Chapter 1.

Part II.  Deterministic Project Evaluation

A. Present Value and the Opportunity Cost of Capital

Brealey, & Myers, Chapter 2.

B. Calculating Present Value

Brealey, & Myers, Chapter 3.
Mian, Vol. I, Chapter 2.

C. After Tax Cash-Flow Models

M.A. Mian (2002) Vol. I, Chapter 4.

D. Investment Decision Rules

Brealey, & Myers, Chapter 5.
Mian, Vol. I, Chapter 6.

E. Making Investment Decisions

Brealey, & Myers, Chapter 6.

Part III.  Understanding Risk & Uncertainty

A. Understanding Risk and Return

Brealey, & Myers, Chapter 7.
Mian, Vol. II, Chapter 2.

B. Capital Asset Pricing Model

Brealey, & Myers, Chapter 8.

C. Capital Budgeting and Risk

Brealey, & Myers, Chapter 9.

Part IV.  Investment Decision Making under Uncertainty

A. Project Analysis

Brealey, & Myers, Chapter 10.

B. Expected Value and Decision Trees

Mian, Vol. II, Chapter 3.

C. Quantifying Attitudes toward Risk

Mian, Vol. II, Chapter 4.

D. Stochastic Simulation

Mian, Vol. II, Chapter 6.

E. Understanding Options

Brealey, & Myers, Chapter 20.

F. Valuation of Options

Brealey, & Myers, Chapter 21.

G. Valuation of Options to Follow-up, Delay, or Abandon Projects

Brealey, & Myers, Chapter 22.
Dixit, A.K. & R.S. Pindyck (1994) Investment under Uncertainty,Chapters 1-2.

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Last updated September 18, 2007.