Question about the value of the firm and project

Hello All,

I am a little confused about the market capitalization and the value of the firm. Let’s say the company is 100% equity-financed with market cap = $100.

Moreover, if I undertake a new project with initial cost C0= -$100, and PV of future cash flows = $150. NPV of the project = $150-100 = $50.

As such, as soon as such projects are anounced the share price goes up by NPV / (Outstanding shares). Why is it that the market capitalization of the firm will go up only by the NPV of the project (i.e. $50) and not go up by the value of the project, which is equal to the future cash flows i.e. total market cap = $100 + $150? By undertaking the project, wouldn’t the project get future cash flows and not just the NPV?

I ask this question because let’s assume that the firm’s current market cap is zero (it’s private) and this is the only project that the company has. In this case, if the company files IPO, the market cap will be equal to the future value of the cash flows, and not just the NPV of the project. Isn’t it? Moreover, the share price will be equal to PV of future cash flows/ outstanding shares. Hence, why is it that the market cap of existing public firms increases only by the amount of NPV?

Can someone please help me?

Thanks,

Allalongthewatchtower

Thanks, but did you see the two examples I posted —IPO and project-based? We do account for the initial cash flows in the IPO, but not in the project for public company.

I am really stuck…I would appreciate if others could help me as well. :frowning: