Using Capital Budgeting Technique of Net Present Value (NPV) to Determine the Benefit of Training Investment

Abstract:     
Evaluating a training programme is one of the stages in the training process. Whilst most organizations do it at the end of the training, the study emphasis that if appraisal on the investment is not done after training needs assessment is conducted, shareholders value can be diluted. This is based on the fact that if the benefits derived from the training programme when converted into present value terms is not sufficient to cover the present cost of the training, it will do more harm to shareholders. The study therefore looked at appraising a training investment before the organization goes into it. For such appraisal to be done, the total cost of the training investment need to be estimated whilst the benefits converted into present value using a discount factor also needs to be determined. It looks at five main areas in estimating the cost of training investment and these are direct cost, indirect cost, development cost, overhead cost and compensation for participants. These costs are wide enough to cover any area where training expenses may occur. For any organization to justify whether it training investment will add value to shareholders wealth, three main decisions need to be taken. These are whether the calculated NPV of the training investment is positive, negative or zero. Whilst positive NPV of any training investment is recommended for contributing to shareholders wealth, just like the normal means of appraising projects, negative NPV of training investment should be rejected especially if that training programme is not mandated by law. The study recommends that zero NPV of training investment should be pursued by the company since although it neither dilutes or adds to shareholders wealth but pursuing the training programme will serve as an intrinsic motivation to employees. The main shortcoming of this paper is that the NPV criteria of evaluating training investment cannot be applied to trainings that are required by law. This is based on the fact that the organization has no choice even if the training investment has a zero or negative NPV but to embark on the training investment.

Number of Pages in PDF File: 14

Keywords: Training investment, NPV, training cost, training benefits, discount factor

JEL Classification: M10, M12, M19

working papers series