 MVA being a mayor is supposed to reflect market assessment of a firm's lifetime NPVs. We know that primary managerial objective of any corporate firm is to work for wealth maximization of its shareholders so that the welfare of the shareholders can be ensured. We know that economic value added is the sum of lifetime net cash flows of a firm then we can say that the present value of this economic value added is basically equal to the net present value of the firm. With these two phenomena we can drive an other equation that market value added of a firm is equal to the present value of its future evas which is basically equal to NPVs of the firm. So there is a relation between these three phenomena that these can be determined at different point of time and they would entail same value. We know that market value is the difference between market value of a firm and its capital. So when we deduct capital of a firm from its total market value the resulting figure is known as market value added whereas market value of a firm is basically the function of its future evas discounted at its back and adding the resulting present value of evas to the company's capital. In this way we can see that the value or market value of a firm is equal to the present value of its future evas and its existing capital. If we see the difference between equation one and equation two we can confirm that the market value added basically is equal to the present value of the firm's future evas. To develop our relation between MVA present value of evas and NPVs we have a little exercise in which we have market value which is 200 million. We have no pair of 20 million, we have capital of 100 million, cost of capital of 10% and opening market value added of 90 million. To determine EVA we deduct the cost of capital which is 10 million from the no pair of 20 and the resulting evas is 10 million dollars. To determine market value added we deduct capital from the market value and for that purpose we deduct 100 million from 200 million and we have a market value added of 100 million. Now we see that value or market value of a firm is equal to the its present value of evas and the capital. Then we add 100 million of capital to the discounted EVA which comes to again 100 because to determine the present value of EVA we need to divide the EVA of 10 million over the cost of capital of which is 10% the resulting figure is 100. Then we add this present value of evas of 100 million to the 100 million of capital. The resulting figure is 200 million which shows that at present the total market value of the firm on the basis of EVA is equal to 200 million. Now let's see the difference of equation 1 and equation 2 which says that market value added is equal to the present value of evas and this is again equal to the NPV. To determine market value added using the present value of EVA we have another value of 100 million dollars. This proves that the market value added of 100 million is equal to the present value of the future evas which is equal to 100 million and again this 100 million is equal to the NPV of the firm. EVA being our performance mayor links external valuation of the company to its internal investment data and by external valuation we means the WEG which is weighted average cost of capital and this WEG is generally based on market value of the firm means market value of the firm's equity and market value of the firm's debt. So far as the internal investment is concerned we for that purpose use the figure of NOPAD which is based on accounting data to develop a relation between these internal and external links we again have a little exercise where we have a capital at the at before two years ago which was 100 million dollars 100 million pound we have further capital issue at NO means we have we have no fresh capital till now we have market value at present which is 200 million we have annual net cash flows in perpetuity which is 20 million we have after tax WEG which is 10% and in this using this data we can check the market value addition or market value added using NPV of the firm in doing so we have another phenomena that is net terminal value. Now what is net terminal value or NTV NTV basically is the cash surplus that can be found at the end of an investments or a project's life in fact when that cash when that cash is discounted at the firm's WEG to determine independently the firm's NPV firms NPV is equivalent to the firm's market value added and the firm's present value of its evas then this terminal value is termed as the net terminal value. Now till now we have developed another fourth model in our equations that is we have market value added which is equal to the present value of economic value added and these are also equal to the firm's NPV then the NPV is also equal to the present value of the firm's NTV which is calculated while discounting the firm's terminal values over its cost of capital which is WEG to develop this relation we have another exercise we have three time periods T0 time 0 which is current time period T1 and T2 we have opening balance which is not available at time 0 we have then cash flows in terms of cash outflows and cash outflows for cash outflows at time 0 we have an investment of 100 million so at the end of zero time period we have a total cash outflow of 100 millions because we have no residual or closing balance we have no residual value now this closing balance of 100 million at time 0 becomes the opening balance of time 1 or T1 as an opening balance during T1 we have one cash outflow in the form of interest expense and we have another cash inflow in the form of net operating net operating profit after tax when we deduct interest expense from net operating after tax we have net outflow of 20 million to determine closing balance when we add this this positive 20 million to the negative 100 million as opening balance we arrive at a closing balance of 90 million dollar as 90 million pound as a negative item this closing balance of 90 million at time T1 becomes opening balance at time T2 during time T2 we have another cash outflow of 9 pounds 9 million in terms of interest expense and we have net operating operating profit of 20 million as cash inflow we also have a realized value of 200 million because this is the last year of the project's life so at the end of year 2 or time 2 we have a net cash inflow of 120 million that 120 million is called as net terminal value of the project when we discount this net terminal value at the cost of capital which is 10 percent we come to a value of 100 million now we see that we have the same value for our mva for our present value of future evas for our net present value and this is the fourth term that is yielding the same value now let's see whether there is any relationship between the honors wealth and the investment policies designed by the firm's management to develop this relationship we have a little exercise whereas we have a we have an all equity financed firm in existence who has annual cash inflows in perpetuity equal to 1 million pound we have no retention this means that every year whole of the income is distributed among the shareholders this another means that we have no retention this means simply that our earning per share is equal to our dividend per share also our cost of equity capital is 10 percent and we have a project proposal to the tune of 2 million then we know that this proposed project will be financed through the coming years cash flows this means that for the second year we will have no dividend for the shareholders as we are going for the reinvestment plan but afterward the whole of the project cost of 2 million will be distributed among the shareholders as dividend now there arises two questions the question one whether the effect of investment on shareholders wealth can be there can it be checked the question two the confirmation of effect can be checked through NPV so we are going to check two items whether the investment policy has any effect on the shareholders wealth and second is that can we check this effect with the help of the firms NPV when we range our cash flows we have a certain time periods like t0 t1 t2 t3 till infinity because we have such a patron in our cash flows we have current years dividend which is equal to 1 million as we are paying whole of our cash flows as dividend then so far as the project cash flows are concerned they are negative in year t1 but positive in year t2 as cash flows are coming back so far as the revised dividend policy is concerned we have no dividend in time one but because we are going to invest our inflows in the project but in year t2 we have a dividend of 3 million because in addition to the regular 1 million the firms proposed project cost of 2 million is giving back to the shareholders now we can determine the change in firms value using the famous dividend discount model in this dividend discount model we will use the constant growth model because we have infinity cash flows to determine these values for the firm we need to divide the dividend at time t over the firms cost of equity doing so we have a value of the firm at existing level means current value of the firm is 10 million pound when we determine revised value of the firm with the reinvestment plane we have a little more computation means we need to divide current period dividend over the firms cost of capital and to discount it for the two periods also to discount this amount by firms cost of capital again for the period of two time periods the resulting figure is 10.744 million so this means that using the existing dividend policy the firm's market value is equal to 10 million pound but with the revised policy with the reinvestment plan the new market value of the firm is 10.744 million so we see that with the reinvestment plan there is an increase in the market value of the firm which is 0.744 million or we can say that the change in market value of the firm is equal to the market value added which is the difference between existing market value and the revised market value and that is equal to 0.744 million now we can confirm this change in market value using the NPV model for that purpose we see that external market value is market value added is basically equivalent to the internally generated EVA of the firm which is also equal to the NPV of the new investment that we have already seen we see that how we can calculate NPV of this project we see that when we compute this NPV we have the answer of same 0.744 million so we see that the there is an impact of investment policy on the shareholders wealth and this effect can also be confirmed or checked through the use of NPV in this example we have seen that shareholders are sacrificing their current period dividend in the wake of value enhancement as a reinvestment plan in the second year or in the year to come this means that market value added which has been created through the project that was a positive to the tune of 0.744 million