[MUSIC] Okay, we got an NPV of -118, right? That's what we just did, we did all those calculations and we figure out the net present value is minus $118 million, okay? What are we going to do with that? Now we have to think about what does net present value mean, okay? How are we going to use net present value to make decisions? In order to understand this, this is really a fundamental point in corporate finance. Let's think about the relationship between NPV and shareholder value, right? If you go back to module one, we talked about the stock price, right, which is the measure of shareholder value that we focus on in corporate finance. The stock price is just the sum of all the future cash profits, discounted to the current period, right? So you take all future profits into account, discounts to the current period, that is how we figured out the stock price as we talked about in module one. Now think about NPV. NPV is the sum of all cash flows that are a direct consequence of making a decision, or taking a decision, right? Discounted to the current period. So we are taking all cash flows into account, discounting to the current period, right? Think about this, these two definitions are the same. They are virtually the same, there is no difference. Mathematically, they are the same, okay. Conceptually, they are the same, right. So really what this means is that NPV and stock prices are equivalent, right. So let's think about that, okay. Let's take this idea, okay, and consider the following question, right. And I think you should be able to answer this even before I do it, okay. We figured out here that if the discount rate is 10%, the NPV is -118 million, okay. So ask yourself the following question. Suppose the company decides to change the system, okay. So you want to change the system, you're gonna change the system, you change the system, okay. What is going to happen to shareholder wealth if the company does that, okay. And then let's try to think about what should the company do, given this. The answer is very simple, right? Since NPV and shareholder wealth are the same concept, since they are mathematically equivalent, what will happen is that shareholder wealth is going to go down by exactly $118 million, okay? If the company makes that decision, then they're going to destroy shareholder value, right? Shareholders are going to lose $118 million. So what should the company do? Obviously, keep the old system, okay? 0 is better than -118, so just do what you're doing right now, okay, no change. No change is the right answer in this case, okay. So finally, we know what to do after many, many slides and assignments regarding the answer to this problem, okay. And I think it really illustrates all the concepts that you have to remember very well, okay. So this is the result, we call this the equivalent result in corporate finance cuz it is a fundamental notion in corporate finance which is the notion that maximizing at present value is equivalent to maximizing shareholder wealth, okay. So if you want to make decisions that increase shareholder wealth, what you do is you take all investments that have positive net present value, right. As long as an investment has positive net present value, net present value greater than zero, it's going to increase shareholder wealth, okay. So, that is the equivalent result. And as we've many things in corporate finance, this result does not always hold exactly, right? In the real world, the equivalence between net present value in corporate and stock prices not going to be perfect, right. For example, the market, the stock market is computing the stock price, the stock market may not have all the information that is required to compute net present value, right? Maybe the project is a secret project, so the market is going to learn about it slowly, right? Managers may have more information than the market, right? Of course the result, just as in module one, we talked about the fact that maximizing a stock price relies on market efficiency, here we have the same concept, okay. If markets are inefficient, then all hell breaks loose. The stock price may no longer reflect future cash flows and then of course, NPV and stock price are not going to be the same thing. So, we are relying on the assumption that markets are reasonably efficient to do this calculation, okay? And finally, this is something that we are not going to cover as much in this course. We did talk about leverage, right? We talked about how to measure leverage for real world companies in module one, right? So when leverage gets very high, there could be problems as well. What happens is that the decisions that maximize firms value may not be the same decisions that maximize the stock price because many of the proceeds may end up going to debtholders, okay? So this sounds a little bit complicated. It is, actually, and it's something that we're not gonna talk about in this course but I just wanted to highlight that leverage may also matter. If you want to learn more about this, you may consider taking the additional corporate finance course that we're going to provide, okay? So this result that NPV and shareholder wealth are equivalent relies on these assumptions but even if they don't hold exactly, it's still a very useful guideline for financial management, okay. Similar to what we discussed in module one, there are no good alternatives to net present value, right? So even if market is not perfectly efficient for example, computing net present value is still a very important step to make sure that managers make the correct financial decisions. 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