Capital Budgeting-related Summary to the Potential Value of Employees respectively Human Resource Capital

The calculated, period-related employee cash flows form the series of payment for the capital budgeting. In order to determine the human capital value, a proceeding of the dynamic capital budgeting, the capital value method is used. This method calculates the present value, whereby the future employee cash flows respectively the difference between incoming payments and outpayments are discounted to the present time at a calculatory interest rate.5

The formula to calculate the human capital value (HCV)/Potential Value (PV) is the following:

with:

pt: predicted employee-specific incoming payments within the period t

ot: predicted employee-specific outpayments within the period t

i: calculatory interest rate

t: period (t = 0, 1, 2,..., n)

n: duration of the business relation.

In the following, the determination of the calculatory interest rate is considered more in detail.

Determination of the calculatory interest rate

In order to determine the present value, the predicted cash flows have to be discounted at a suitable calculatory interest rate. Since the human capital value represents one part of the company's capital value, the methods of corporate appraisal and of the assessment of investment projects are useful.6 To fulfill the requirements of the investor, the weighted average cost rate of capital (WACC) may be used as minimum interest rate. The weighted average cost of capital are calculated as follows7:

with: cEc: cost of equity capital EC: equity capital t: tax rate

cDC: cost of debt capital DC: debt capital

The cost rate of equity capital can be determined on the basis of the capital asset pricing model (CAPM),8 which aims at establishing a risk-adjusted yield claim for any capital investment.

The cost of equity capital is composed as follows:

Cost of equity capital = risk-free interest rate + risk premium of the equity capital Risk-free interest rate = 'real' interest rate + expected inflation rate Risk premium = Beta * (expected market yield - risk-free interest rate).

The risk premium of the market represents the additional remuneration that investors demand in order to invest in the company instead of choosing a 'secure' investment.10 To determine the cost rate of debt capital, the average of all costs of debt capital within the planning period should be employed.

Possible application and interpretation of the results

Due to the detailed acquisition of the personnel costs, which encompass a loin's share within a service providing company, the intangible components are identified and evaluated monetarily. In that way it can be analyzed, how far certain costs of the personnel department caused revenues. Already in the planning phase it can be examined, if the intended measures bear a reasonable relation to the expected benefit. Moreover, the data are useful to evaluate current personnel configurations in the sense of a stock analysis.

The development of intangible assets, such as the establishment of a brand or the education of an employee, is not regarded as balance-sheet investment, yet. Nevertheless, it is possible to carry out an (internal) capital budgeting-based evaluation by means of the explained model. The shown potential -respectively human capital value enables both the evaluation of the building of intangible assets and the prediction of the related attainable future surplus of incoming payments. Furthermore, the expected results might be consulted for defining the performance targets and controlling the achievement.