PROFIT MAXIMIZATION - Accounts and Finance for Managers

The projects are considered on the basis of the following criterion:

If the project is having the scope to have an increase in the volume of profits, the project is suggested to accept and vice versa.

The financing, investment and dividend decisions of the enterprise is dome shaped towards the profit maximization.

Under this, the profit is defined in two different angles viz. Owner's and Operational perspective.

Owners' perspective definition of profit is the share of national income paid to the owners.
Operational perspective defines the term profit as when the output exceeds the inputs of the process.

The testing, selecting of the assets and projects are normally on the basis of the profitability of the firm. If the firm is found to be profitable, suggested to accept, otherwise, the decision is vice versa.

Profit Maximization in Finance

Profit is a test of economic efficiency which is individual aim to achieve at always though it is closely associated with the social welfare.

Criticism

There is misapprehension about the workability of the private enterprise which normally strives for the profit maximization but not by considering the welfare of the society

The next most important criticism is that in ability to fit into the practical considerations

The second set of criticism is that the set of technical flaws or set backs associated with the financial management.

The technical flaws of the profit maximization is studied under three different headings viz:

Ambiguity
Timing of benefits
Quality of benefits

Ambiguity: Profit is to be maximized; which profit has to be maximized? Either Net profit or Gross profit is to be maximized? Whether the short term or long term profit is to be maximized? Whether total profit or rate of profit is to be maximized? Whether the return on the total assets employed or the return on the total capital employed is to be maximized?
The maximization of profit is vague due unclear definition of the term profit.

PROFIT-MAXIMIZATION

From the above table, the two alternative projects A and B are found to be identical with reference to profit maximization due to equivalent volume of profits of them.
Really speaking, these two projects are not identical, why?

One missing phenomenon is that timing of benefits.

The timing of benefits should be relatively given greater importance for weighing the project at the moment of consideration.

Project alternative A is better than the project alternative B, why?

Project alternative A is able to generate the benefits during the period 1 which is known as earlier benefits, facilitating the A alternative to go for reinvestment, but in the case of reinvestment opportunity is denied due to non availability of profits during the early season i.e. period 1

PROFIT-MAXIMIZATION

Under the profit maximization, the quality of benefits are not considered what is meant by the quality of benefits?

It means the certainty of benefits. The more certain the benefits is better the quality of benefits and vice versa. The profit maximization failed in its attempt to consider the quality of benefits. It has considered the both project are identical but really they are not. Alternative B project is more volatile returns in other words they are more uncertain unlike the project A. The project A is having only least volatility in the earning pattern during the three seasons. A is the better project which has greater certainty in accruing benefits over the others, are normally preferred by the risk averters.


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