Profit Maximization vs Wealth Maximization

Feature	Profit Maximization	Wealth Maximization
Focus	Short-term earnings	Long-term value
Planning Horizon	Immediate profits	Long-term growth
Risk Management	Minimizes expenses, avoids hedges	Works on risk mitigation
Pricing	High prices for maximum margins	Lower prices to build market share
Capacity	Enough for current sales	More for long-term projections

While profit maximization is a short-sighted approach, wealth maximization focuses on long-term value creation for shareholders. Wealth maximization addresses the shortcomings of profit maximization by:

• Considering time value of money
• Accounting for risk and uncertainty
• Using a clear and unambiguous cash flow-based approach.

Therefore, wealth maximization is the most appropriate and effective objective of financial management, guiding decisions to increase the long-term value of the business.