Maximizing Profits Versus Maximizing Shareholder Value

Bob is the CEO of a local power company named PowerQuest. One of his companys biggest assets is a brand new nuclear power plant located on the banks of the Teton River in Eastern Idaho. The power plant generates $150 million in annual revenues. Fixed costs are very high (approximately $125 million per year). There is virtually no competition in the local market for electrical power. Bob told his management team in their last meeting that his number one priority was to find ways to increase the value of the company by making the company more efficient. He asked his managers to report back to him with ideas on ways to cut costs at the company. John, the nuclear power plant manager, approached Bob this morning with an idea that he claimed would save PowerQuest $10 million in annual fixed expenses. John suggested that instead of paying a waste management company $10 million per year to dispose of nuclear waste created by the nuclear power plant, PowerQuest should start disposing of the nuclear waste itself. John suggested that the most cost-effective way to accomplish this would be to simply dump the nuclear waste into the Teton River (at night, of course). By Bobs calculations, Johns cost-cutting suggestion will increase the nuclear plants profits by 66% annually (from $25 million to $35 million per year). This would make a significant contribution to the overall profitability of PowerQuest.

Question 1: Does Johns suggestion help PowerQuest to maximize profits? How? Question 2: Does Johns suggestion help PowerQuest to maximize shareholder value? Why or Why not? Question 3: What will be the long-term effect on shareholder value if Bob chooses to dump the nuclear waste into the river? Question 4: How can maximizing shareholder value be different than maximizing profits?