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

Under the wealth maximisation objective, a project is preferred over a profit-maximisation view mainly because wealth maximisation:

Wealth maximisation is superior because it takes into account the timing of cash flows through discounting and the risk of those flows through the discount rate. Profit maximisation ignores both, uses accounting profit, and is ambiguous about which period's profit matters.

  1. AConsiders the timing of cash flows and the risk attached to themCorrect
  2. BFocuses on accounting profit of the current year
  3. CIgnores the cost of capital to keep the analysis simple
  4. DAims at maximising dividend paid in each year

Explanation

Wealth maximisation measures the present value of future cash flows discounted at a rate reflecting risk, so it accounts for time value and risk. Profit maximisation is vague about timing and risk and relies on accounting profit. The other options describe features that wealth maximisation does not have.

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