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CS Executive · Corporate Accounting and Financial Management · Introduction to Financial Management

Under the wealth maximisation objective, a financial manager should accept a project primarily when it:

A project should be accepted when its net present value is positive at the firm's cost of capital, because it then adds to shareholder wealth. Wealth maximisation considers the timing and risk of cash flows, unlike short-term profit or simple payback measures.

  1. AIncreases the firm's current year accounting profit
  2. BHas a positive net present value at the firm's cost of capitalCorrect
  3. CHas the shortest possible payback period regardless of cash flows after payback
  4. DIs financed entirely by retained earnings

Explanation

Wealth maximisation focuses on increasing the value of shareholders' holdings, which considers timing and risk of cash flows. A positive NPV at the cost of capital adds value. Current profit ignores time value and risk, and payback ignores later cash flows.

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