Skip to content

CA Intermediate · Financial Management and Strategic Management · Scope and Objectives of Financial Management

A firm's board is choosing between two projects. Project A gives expected profits of ₹10 lakh with very high uncertainty about timing; Project B gives ₹9 lakh with near-certain timing. A manager argues for B even though A has higher profit. Which limitation of profit maximisation as a goal does this argument most directly reflect?

The manager's preference reflects the limitation that profit maximisation ignores the timing of returns and their risk. Project A has a higher profit but uncertain timing, while Project B is more certain. Wealth maximisation accounts for time value and risk, which profit maximisation does not.

  1. AIt ignores the time value of money and risk of returnsCorrect
  2. BIt ignores the social responsibility of the firm
  3. CIt cannot be measured in rupee terms
  4. DIt focuses only on long-term growth of the firm

Explanation

Profit maximisation ignores the timing of benefits (time value of money) and the risk/uncertainty attached to them. The manager prefers B because its returns are more certain and better timed. Profit is measurable in rupees, and the goal is criticised for being short-term, not long-term, so the other options are wrong.

Did you get it right without looking?

One question tells you little. A timed set on Scope and Objectives of Financial Management shows your real accuracy, how long you take and where you lose marks.

Practise Scope and Objectives of Financial ManagementFree diagnostic mock

More Scope and Objectives of Financial Management questions