Wealth maximization means the goal of the firm should be to maximize the market value of its equity shares which represents the value of the firm to its equity shareholders. Wealth maximization means maximizing the net present value of a course of action. That financial action which has a positive net present value creates wealth and therefore is desirable. It is consistent with the objective of maximizing owner's economic welfare. It implies the fundamental objective of a firm should be to maximize the market value to its shares. In corporation, a management team is elected to manage its activities. Management is supposed to operate in the best interests of the shareholders. Some have argued that the managers could work just enough to keep stockholders' at a "fair" or "reasonable" level and then devote the remainder of their efforts and resources to public service activities, to employee benefits of higher executive salaries. Similarly, the stockholders generally hold portfolio of many different stocks to reduce total risks and to optimize the return.
In simple words, capital budgeting is the process of making investment decision in capital expenditure. A capital expenditure may be defined as an expenditure, the benefits of which are expected to be received over a period of time exceeding one year. So in simple language, we can say that a capital expenditure is an expenditure incurred for acquiring or improving the fixed assets, the benefits of which are expected to be received over a number of years in future. Therefore, the capital budgeting decision involves a current outlay or series of outlay of cash resources in return for an anticipated flow of future benefits. In other words the system of capital budgeting is employed to evaluated expenditure decision which involve current outlay but are likely to produce benefits over a period of time longer than one year. 1. Pay back period : The pay back period is one of the most popular and widely recognized traditional methods of computing investment projects. The payback i
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