Wealth Maximization is superior then the profit maximization
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Wealth maximization is superior to profit maximization for several reasons. Wealth maximization considers long-term sustainability rather than short-term profits. It accounts for the time value of money by discounting future cash flows. Wealth maximization also factors in risk and uncertainty through the discount rate. The goal of wealth maximization is to improve shareholder value, while considering the total value generated relative to costs for the business. It provides a more efficient allocation of resources while also ensuring benefits to society.
Wealth Maximization is superior then the profit maximization
- 1. Presented By : Bhanu Prakash .A (2VX13MBA02) Wealth Maximization is superior then the profit maximization Discuss Presentation On
- 2. Meaning <*> Profit Maximization : Profit Maximization is thetraditional and Narrow approach, in thisprocessCompanies undergo to Determine the best Output and pricelevels in order to maximizeits return Thecompany will usually adjust influential factors such asproduction costs, saleprice, and output levels asaway of reaching its profit goal. <*> Wealth Maximization : Thewealth maximization objective isalmost universally accepted goal of afirm. According to thisobjective, the managersshould takedecisionsthat maximizetheshareholders' wealth. In other words, it isto maketheshareholdersasrich aspossible. Shareholders' wealth ismaximized when adecision generatesnet present value.
- 3. Wealth Maximization Is superior Then Profit Maximization Firstly, thewealth maximization isbased on cash flows and not profits. Unliketheprofits, cash flowsareexact and definiteand thereforeavoid any ambiguity associated with accounting profits. Secondly, profit maximization presentsa shorterterm view as compared to wealth maximization. Short term profit maximization can beachieved by themanagersat thecost of long term sustainability of thebusiness. Thirdly, wealth maximization considersthe time value of money. It isimportant asweall know that adollar today and adollar oneyear latter do not havethesamevalue. In wealth maximization, thefuture cash flowsarediscounted at an appropriatediscounted rateto represent their present value. Fourthly, thewealth maximization criterion considersthe risk and uncertainty factor whileconsidering thediscounting rate. The discounting ratereflectsboth timeand risk. Higher theuncertainty, the discounting rateishigher and vice-versa.
- 4. Wealth Maximization Is superior Then Profit Maximization (Cont…) Wealth Maximization issuperior to theprofit maximization because themain of thebusinessconcern under thisconcept to improvethe valueor wealth of theshareholder Wealth Maximization considersthecomparison of thevalueto cost associated with thebusinessconcern. Total valuedetected from the total cost incurred thebusinessoperation. Wealth maximization consider both timeand risk of thebusiness. Wealth Maximization providesefficient allocation of resource It ensurestheeconomic interest of thesociety