Explain the term - timing of benefits, Financial Management

Assignment Help:

Explain the term - Timing of Benefits

A more significant technical objection to profit maximisation, as a guide to financial decision making, is that it ignores the differences in time pattern of the benefits received from investment proposals or courses of action. When working out profitability, "the bigger the better" principle is adopted, as decision is based on the total benefits received over the working life of asset, irrespective of when they were received. Consider Tablebelow.

408_Timing of Benefits.png

 

It can be seen from Table that total profits associated with alternatives, Aand B, are identical. If profit maximisation is decision criterion, both alternatives would be ranked equally. Though the returns from both the alternatives differin one significant respect, whereas alternative A provides higher returns in earlier years,returns from alternative B are larger in later years. Therefore, two alternativecourses of "action aren't strictly identical. This is principally because a basic dictumof financial planning is the earlier the better as benefits received sooner are more voluble than benefits' received later.Reason for the superiority of benefits nowover benefits later lies in the fact that former can be reinvested to earn a return.This is mentioned to as time value of money. Profit maximisation criterion doesn'tconsider the distinction between returns received in different time periods and treatsall benefits irrespective of the timing, as equally valuable. This not true in actualpractice as benefits in early years must be valued more highly than equivalent benefitsin later years. Assumption of equal value is inconsistent with real worldsituation.

 

 


Related Discussions:- Explain the term - timing of benefits

Cash vs. accrual accounting, Cash vs. Accrual Accounting: While it is b...

Cash vs. Accrual Accounting: While it is beyond the scope of this module to assess accounting systems against all types of accounting styles, it is important that managers unde

Securities exchange act, Securities Exchange Act of 1934 With this Act,...

Securities Exchange Act of 1934 With this Act, the Congress created the Securities and Exchange Commission. The Act empowers the SEC with broad authority over all aspects of th

Define when u.s. dollar weakens in foreign exchange market, What does it me...

What does it mean when the U.S. dollar weakens in the foreign exchange market? While the U.S. dollar weakens in the foreign exchange market one U.S. dollar buys smaller amount un

Effective annual rate, You are interested in saving money for your first ho...

You are interested in saving money for your first house. Your plan is to make regular deposits into brokerage account which will earn 14%. Your first deposit of $5,000 will be made

What is rationale and behind profitability maximisation, What is Rationale ...

What is Rationale and behind profitability maximisation Rationale & behind profitability maximisation, as a guide to financial decision making, is simple. Profit is a test of e

Types of equity securities , Types of equaty Securities Equity securiti...

Types of equaty Securities Equity securities, traditionally, are classified into two types when they are issued. They are: Common Stock, and Preferred Stock.     Common Stoc

Forward contracts, Forward Contracts: The origin of forward contracts i...

Forward Contracts: The origin of forward contracts is lost in history. Some authors suggest that, it was India where these contracts took birth, while some others suggest that

Compute the discount and premium, Suppose the bid-ask spot prices for one B...

Suppose the bid-ask spot prices for one British pound are $1.50 and $1.60 respectively. 1. Compute the bid-ask prices for one US dollar in terms of British pound. 2. Suppose

Capital Strructure., What is the rational for having different types of sec...

What is the rational for having different types of security

Orperating cycle, #discuss the applicability of an operating cycle in veget...

#discuss the applicability of an operating cycle in vegetable growing business in uganda..

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