Criticism of profit maximization approach, Financial Management

Assignment Help:

Criticism of Profit Maximization Approach:

(i) Ambiguous: - One practical complexity with this approach is that the term profit is ambiguous. Different people take dissimilar meaning of term profit. For illustration:

  • Profit may be short-term or long-term.
  • Profit may be before tax or after tax.
  • Profit may be total profit or rate of profit.
  • Profit may be return on total capital employed or total assets or shareholders funds.

(ii) Ignores the Time Value of Money: - This approach disregard the time value of money. It doesn't make a distinction between profits earned over the different years. It ignores the fact that the worth of one rupee at present is greater than the value of same rupee received after one year.

(iii)Ignores Risk Factor: - This schema ignores the risk associated with the earnings. If the two firms have the entirety expected earnings however if earnings of one firm fluctuate considerably as compared to the other it will be more risky. It is therefore clear that profit maximization criterion is inappropriate and inappropriate. It isn't only ambiguous but fails to solve the problems of time value of money and the risk. An substitute to profit maximization which solves these problems is the criterion of wealth maximization.


Related Discussions:- Criticism of profit maximization approach

Management of pension funds, Management of pension funds Employees Prov...

Management of pension funds Employees Provident Fund Organization (EPFO) is the major organization which deals with the pension system in India. The Employees' Provident Fund O

What is the exit strategy for equity stake venture, What is the Exit strate...

What is the Exit strategy for equity stake venture Exit strategy for equity stake venture capitalists and other financiers may include: (i) Selling their shares to the publ

Constructing the theoretical spot rate curve for treasuries, The following ...

The following treasury issues can be included for the construction of the curve: On-the-run treasury issues. On-the-run treasury issues and sele

Is it possible to make money in the stock market, Is it possible to make mo...

Is it possible to make money in the stock market when the quotations are going down? What is credit sale? There are three simple moves to make money when prices are going down:

Advantages and disadvantages of internal rate of return, What are the advan...

What are the advantages and disadvantages of the internal rate of return method? The internal rate of return process is a discounted cash flow method and a number expressed as

What is the difference between ias 14 and ifrs 8, Differences between IAS 1...

Differences between IAS 14 and IFRS 8 IFRS 8 requires identification of operating segments based on internal reports which are regularly reviewed by management for decision

Explain term financial intermediaries, Financial intermediaries Financi...

Financial intermediaries Financial intermediaries are significant to the efficient functioning of the financial markets as they act to bring the borrowers/companies and lenders

Determine the expected return, Question : (a) Lucky Corporation is cons...

Question : (a) Lucky Corporation is considering an investment in one of the two mutually exclusive proposals: Project A which involves an initial outlay of Rs 170,000 and Proj

Define inventory is sometimes thought of as a necessary evil, Inventory is ...

Inventory is sometimes thought of as a necessary evil.  Explain. Inventory ties up funds and these types of funds are not earning an explicit return.  A few inventory is often es

Explain and compare forward vs. backward internalization, Explain and compa...

Explain and compare forward vs. backward internalization. Forward internalization takes place when MNCs with intangible assets make FDI in order to use the assets on a larger sca

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd