Profit Maximization is the traditional approach, in this process Companies undergo to Determine the best Output and price levels in order to maximize its return. The company will usually adjust influential factors such as production costs, sale price, and output levels as a way of reaching its profit goal. The overall objective of business enterprises to earn at least satisfactory returns on the funds invested to sustain in the market for long periods.
Wealth maximization is almost universally accepted and appropriate goal of a firm. According to wealth maximization, the managers should take decisions that maximize the net present value of the shareholders or shareholders’ wealth. The wealth maximization principle implies that the fundamental objective of a firm is to maximize the market value of its shares.
Let us see some of the differences between Profit Maximisation and Wealth maximization
|PROFIT MAXIMIZATION||WEALTH MAXIMIZATION|
|Profit Maximization is based on the increase of sales and profits of the organization.||Wealth Maximization is based on the cash flows into the organization.|
|Profit Maximization emphasizes on short term goals.||Wealth Maximization emphasizes on long term goals.|
|Time Value of Money|
|Profit Maximization ignores the time value of money. Time value of money refers the money receivable today is more valuable than the money which is going to be recieved in future.||Wealth Maximization considers the time value of money. In wealth maximization, the future cash flows are discounted at an suitable discounted rate to represent their present value.|
|Profit Maximization ignore the risk and uncertainity.||Wealth Maximization considers the risk and uncertainty.|
|In the new business environment Profit maximisation is regarded as unrealistic, difficult, inappropriate and immoral.||Wealth maximisation objectives ensures fair return to the shareholders, reserve funds for growth and expansion, promoting financial discipline in the management.|
|Profit Maximization objective leads to exploiting employees and consumers. it also leads to inequalities and lowers human values.||Wealth Maximization provides efficient allocation of resource, It ensures the economic interest of the society.|