Question - Explain how a capital budget and a return on investment contribute to sustainable growth. Clarify the role that risk analysis plays during capital investment decision making. Provide 1 reference that discusses cost containment and patient care.
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Answer - Analysis of Contribution of Capital Budget and Return on Investment to Sustainable Growth
In today's world of high competition merely cutting cost cannot contribute for increasing profitability. An organization is required to adopt effective capital budgeting techniques along with the analysis of the return on the investment for having sustainable growth. It is to be noted that decision making for investment in capital have many risks attached with it. Therefore, capital budgeting methods and techniques are required to be adopted for the same. Capital Budgeting helps in analysis of the step by step process which is used by the business for determination of the merits of a project which is being analysed for making investment decisions. Company growth initiatives includes analysis of the decision with respect to the acceptance and denial of an investment project as because there is determination of the rate of return on such project taken into consideration are computed and compared with the other projects and then best among them is being taken up by the company. The required rate of return of companies differ even if they operate in similar industry as because it is influenced by many factors which are company and project specific. The capital budgeting helps in creation of accountability and can be measured. Capital budgeting helps in contribution of an organization to have sustainable growth because of the following reasons:
- Capital budgeting helps in development and formulation of goals that are long term in nature which is very much essential for the growth of the business
- New projects are analysed for making investment decisions which further helps in competing and obtaining profits.
- It helps in estimation of cash flows that will take place in future, thus helping in the analysis that whether the return on investment on that project will be enough
- It helps in monitoring and controlling expenditure
- A set of decision rules can be categorized for the company for making investment decisions.
Analysis of the Return on Investment, popularly known as ROI is of utmost importance for making effective managerial decisions along with contribution towards growth of the company being sustainable in nature. It basically helps in the analysis of the various aspects of business and decision making is being impacted majorly. ROI helps in identification of all those possible future events that might have effect on the investment payback along with considering the likelihood of their occurrence and assessment of the results thereon. The goal of all these assessment includes analysis of any risk that might exist which will have a direct impact on the sustainability of the growth initiatives being taken by the company. Profitability cannot mere be increased by cutting the cost and requires company along with its executives to take all the steps to have planning for expansion by making new investment in the projects where the return on investment matches the required rate. However, it is to be noted that there are many risks associated with the same which cannot be ignored but steps can be taken for the minimisation of the same.
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