Decision evaluation for owner wealth

THIS FRAMEWORK FOR EVALUATING MANAGERIAL DECISIONS FROM THE OWNER'S VIEWPOINT USES CAPITAL MARKET THEORY CONCEPTS. EACH DECISION IS VIEWED ACCORDING TO ITS EFFECT ON RETURN AND RISK. ONE SOLUTION OF THE RETURN-ON-INVESTMENT METHOD OF ASSESSING DECISIONS IS THE ADOPTION OF THE WEALTH MAXIMIZATION OBJECTIVE. ACHIEVEMENT OF THIS OBJECTIVE NECESSARILY REQUIRES A TRADE-OFF BETWEEN RISK AND RETURN. A MANAGER MAY INCORPORATE CONSIDERATIONS OF RISK AND RETURN INTO HIS THINKING BY MAKING DECISIONS WHICH RESULT IN GREATEST CAPITALIZED CASH-FLOWS. UNDER THIS APPROACH. EXPECTED CASH FLOWS FROM RISKY PROJECTS ARE DISCOUNTED AT HIGHER RATES THAN THOSE FROM LESS RISKY PROJECTS. A VARIANT OF THIS PROCEDURE IS TO ADJUST THE UNCERTAIN CASH FLOWS, AND TO USE A DISCOUNT FACTOR REFLECTING A RISK-FREE INVESTMENT. IN EITHER CASE, BOTH QUANTITY AND QUALITY OF RETURNS ARE CONSIDERED. CHARTS, REFERENCES.