[MUSIC] How do companies create value for shareholders? Right? That is a fundamental question, it's the question that drives a lot of corporate finance teaching, research, and real world practice, right. There are two main sources of value creation. The first one is creating new products, right. If a company creates a product that people love, that people want to pay a high price for, right. That is going to generate profits. That is going to create shareholder value, okay. The other main way in which companies can create value is by buying other companies that have created valuable projects, right? So you either create it yourself, or you find a way of buying other companies that have done it for you. Okay? Unfortunately, a finance professor like me is not gonna be able to tell you how to create something like an iPhone, okay? That's not what finance is about, we are not inventors, maybe we wish we were but we are not, okay? What we can do, what we know how to do, and what you will learn in this module, is to figure out how a new investment was going to contribute to shareholder value, okay. We have tools, we have techniques, we have formulas, we have calculations that we can use to try to figure out whether a new idea, whether a new investment, and also an acquisition is going to contribute to shareholder value or not. Are you increasing shareholder value by creating a new product, or are you destroying shareholder value? Okay? And in some cases we may even be able to stop a new product from being made. Okay? One of our roles is to, in some cases, figure out that an idea,no matter how cool it sounds, no matter how important may be, is going to destroy shareholder value. And if a company is maximizing shareholder value, perhaps that product should not be made. That acquisition should not be made, this idea should not be developed. Okay? So, that is what the finance professor can help with. In the next two modules, we're going to develop these techniques. Okay? To be able to estimate the contribution of a new project or a new acquisition to shareholder value. We're going to start on module three by thinking about investment. Okay? So we're gonna be learning tools that are going to allow companies to make decisions about projects. And then on module four we're gonna talk about mergers and acquisitions. So that is the game plan in terms of our next two modules. For this module specifically, what you will learn is the first time we're gonna talk about this essential concept in finance, which is the notion of net present value. This is a very important idea and we're gonna spend a lot of time talking about NPV to really make sure that you understand how to calculate and how to use NPV. Okay? We're going to learn how to use NPV and why NPV equivalent to maximizing shareholder value, right? One thing we're gonna learn is that NPV. If you use NPV to make investment decisions, you are essentially maximizing the company's stock price, okay? And then of course, if you're taking a corporate finance course, you have to learn how to build NPV calculations. How to build cash flows, how to computer NPV, how to use NPV to make decisions. So we're going to learn this is this module, okay? We are also going to talk about the concept of internal rate of return. We're going to learn how to compute rates of return on projects, and then we're gonna talk about the relationship between NPV and IRR, okay? It turns out that there are some cases in which you can compute a rate of return on a project, and there are some cases in which you should not compute the rate of return on a project. And you should be using only NPV to make investment decisions. So we're gonna talk about that. Okay? And then, finally, we're going to incorporate a very important idea, as well, which is the idea of real options. Okay? Many investment decisions are going to come embedded with real options. Options to wait, options to abandon, options to change, options to expand, okay? And we're gonna try to think about how to model these options and how to incorporate them into investment decision, okay? It turns out that we're going to use this very useful tool called a decision tree. To make this, to incorporate real options into evaluation. We're gonna talk about a few specific examples. In particular, we're going to learn how to value R&D. That is a very important part of the economy. It's of growing importance in economies around the world, and it turns out that to value R&D, you have to use real option techniques. Okay, so we're gonna discuss our indivaluation. In addition to that, we're going to discuss two additional options which are the option to wait and the option to abandon a project. Again, what you're going to see is that we can incorporate these options into investment decisions by using decision trees.