Profit Maximization

- In economics, profit maximization is the short run or long run process by which a firm
determines the price and output level that returns the greatest profit. There are several
approaches to this problem. The total revenue–total cost perspective relies on the fact that profit
equals revenue minus cost and focuses on maximizing this difference, and the marginal revenue–
marginal cost perspective is based on the fact that total profit reaches its maximum point where
marginal revenue equals marginal cost.

 For example, if the business doesn't lack customers, the owner could respond by
reducing operating hours and enjoying more leisure. Or, the business owner may seek
satisfaction by earning as much profit as possible. This is the alternative we will focus on
in class - for a very good reason.

HOW TO MAXIMIZE PROFIT SUBJECT TO CASH CONSTRAINT

- Innovative ideas and different business practices can mean the difference between
business survival and failure during times of low cash flow. While most businesses
occasionally have times when their available cash is less than what the owner is
comfortable with, the successful owner is able to maximize profits even with a low
balance in the bank

NET PRESENT WORTH

- Net present worth (NPW) is defined as the sum of the present values (PVs) of
incoming and outgoing cash flows over a period of time. Incoming and outgoing cash
flows can also be described as benefit and cost cash flows, respectively

TIME VALUE OF MONEY

- The idea that money available at the present time is worth more than the same amount in the
future due to its potential earning capacity. This core principle of finance holds that,
provided money can earn interest, any amount of money is worth more the sooner it is received.

 If I offered to give you $100, you would probably say yes. Then, if I asked you if you wanted the
$100 today or one year from today, you would probably say today. This is a rational decision
because you could spend the money now and get the satisfaction from your purchase now rather
than waiting a year. Even if you decided to save the money, you would rather receive it today
because you could deposit the money in a bank and earn interest on it over the coming year. So
there is a time value to money.
CALCULATION OF PRESENT WORTH

- Definition: The current worth of a future sum of money or stream of cash flows given a
specified rate of return. Future cash flows are discounted at the discount rate, and the
higher the discount rate, the lower the present value of the future cash flows.

RETURN ON INVESTMENT OR NET WORTH

- Is the benefit to the investor resulting from an investment of some resource. A

high ROI means the investment gains compare favorably to investment cost.

RISK

- Financial risk is an umbrella term for multiple types of risk associated with financing,
including financial transactions that include company loans in risk of default.[1][2] Risk is a term
often used to imply downside risk, meaning the uncertainty of a return and the potential for
financial loss

RISK AND RETURN FACTORS

- The amount one would anticipate receiving on an investment that has various known
or expected rates of return.

 For example, if one invested in a stock that had a 50% chance of producing a
10% profit and a 50% chance of producing a 5% loss, the expected return
would be 2.5% (0.5 * 0.1 + 0.5 * -0.05). It is important to note, however, that
the expected return is usually based on historical data and is not guaranteed.

FINANCIAL STATEMENT

- A financial statement (or financial report) is a formal record of the financial activities of a
business, person, or other entity. Relevant financial information is presented in a
structured manner and in a form easy to understand.

BALANCE SHEET

- A statement of the assets, liabilities, and capital of a business or other organization at a

particular point in time, detailing the balance of income and expenditure over the
preceding period.