When evaluating, when assessing a range of business propositions,
what management does is consider the net present value
of future cash flows generated by each of those business propositions.
And in the next module, we'll take a much closer look, detailed look,
at what that net present value methodology entails.
We will be using discounted cash flow methodology where we account for
the time value of money.
For the fact that we invest now for
the future where cash flows will only eventuate over time.
We'll also deal with risk involved in those decisions.
Future cash flows are not necessarily guaranteed.
How we'll deal with that will be discussed in quite some detail in the next module.
We find some direct evidence of wealth maximization by changes in
the market value of equity, the share price determined on the share market.
If a corporation decides to invest in it's cash to develop
valuable new intellectual property, then the shareholders will recognise that.
They will realise the opportunity of future positive cash flows
associated with this investment in new technology,
in new research and development, leading to better outcomes for the firm.
And they will reflect
that increase in value by bidding up the price of the shares on the share market.
That will not be easily reflected in the financial statements.