Cash Management Policies for Alternative Objectives: Profit Versus ROI Maximization

While shareholder wealth maximization is accepted by finance theoreticians as the financial goal of the firm, the implementation of this goal is not simple. There can be significant economic impacts of using an alternative goal such as return on investment (ROI) maximization instead of net present value maximization. Many areas of management discretion can be affected by the choice of ROI maximization versus profit maximization. Differential managerial decisions for these two alternative goals have been noted in such areas as investments in new plant and equipment, investments in research and development, and maintenance of plant and equipment. In addition, managers may have preferences among alternative accounting policies (depreciation schema and inventory valuation methods) that depend on their objective.