1. In the first problem, we learn how to apply different investment decision criteria to choose among projects Specifically, the NPV tells us how much value is created by taking a project In problem #3, we want to see how a project’s NPV translates to changes in market value of a firm. In this problem, we make the following assumptions – Markets are rational and efficient – Perfect information – i.e., market participants fully know the value of the project 1* These slides are most useful for mini-problem #3

2. Case 1: Suppose management used internal funds to carry out the project and then afterwards disclose to the market that they carried out the project – Asset side of the balance sheet will rise to $1,100,000 – Equity side will rise to match the asset side – Stock price will rise to $110 – Current investors will gain 10% 2

3. Case 2: Suppose management initially kept the project a secret and raised new equity at the prevailing market price. Management makes the disclosure after it has taken on the project – Need to raise $110,000 at $100 1,100 new shares sold Shares outstanding now at 11,100 – After disclosure, market value of VAI will rise to $1,210,000 – Stock price will rise to $109 – Current investors will gain 9%. Some of the benefits shared with new shareholders 3