Answer to Question #155896 in Management for Prabhdeep

Question

"Long term investment decisions cannot be based on return on investment since maximizing rate of return does not matter when aim is to maximize return to shareholders?"comment ?(please answer in 200 to 250 words)

Answer 1

ROI tries to directly measure the amount of return on a particular investment, relative to the investment's cost.

Long-term investments are assets that a company intends to hold for more than a year.

The long-term investment account differs largely from the short-term investment in that short-term investments will most likely be sold, whereas the long-term investments will not be sold for years and, in some cases, may never be sold.

The shareholder wealth maximization goal states that management should seek to maximize the present value of the expected future returns to the owners (that is, shareholders) of the firm. In addition, the greater the risk associated with receiving a future benefit, the lower the value investors place on that benefit.

The shareholders are willing to accept a certain amount of risk in pursuit of potentially higher rewards and that you can afford to be patient for a longer period of time. It also suggests that you have enough capital available to afford to tie up a set amount for a long period of time.

More often, long-term investment re-uses the same capital relatively infrequent in comparison to trading, the annual returns are generally lower than those of a professional trader. Therefore, Long term investment decisions cannot be based on return on investment since maximizing rate of return does not matter when aim is to maximize return to shareholders