The shareholder wealth maximization concept implies that maximizing shareholder wealth should be the primary goal of financial management. In order to achieve that objective, it may be critical to evaluate the potential economic efficiency of projects and reject ineffective investments. Net present value or present net worth is used to evaluate investments with cash flows occurring at different times. According to the shareholder wealth maximization concept, it may be necessary to undertake projects with a positive net present value. Therefore, there is a strong correlation between net present value and shareholder wealth maximization. In some cases, maximizing net present value is viewed as an essential element of the concept.
Net present value takes various aspects into consideration. It uses a specific discount rate that depends on external factors such as inflation and internal aspects such as investment-related risks. The positive net present value may indicate that a particular project or investment is profitable and may lead to an increase in the market value of the shares, which is the objective of the shareholder wealth maximization concept. Even though the net present value is a significant criterion for investment evaluation, it does not provide an imminent prognosis. There is a wide variety of aspects and external risks, making the net present value of a project irrelevant. For example, these aspects may include rapid changes in inflation rates or interest rates.