Question

(b) Use the Net Present Value (NPV) concept to discuss how a worker goes about making their decision to invest in education and training? Be sure to highlight any assumptions made and the appropriate necessary and sufficient conditions of their decision.

Answer 1

ANS: NPV is the difference of present value of cash inflow and present value of cash outflow. Decision are based on value of NPV, if NPV is positive or zero - project is acceptable, whereas when value of NPV is negative - project shall be rejected.

Assumptions of NPV are -

1. cash generated by the project are re-invested to generate return at a rate equal to discounted rate
2. The inflow & outflow of cash other than initial investment occur at the end of each year.

Use of NPV in education & training-

The long working life of employees makes the NPV of investment in human capital positive, thus longer staying of employees within the organisation leads to more return on investments in education & training program.

Training & education increases worker efficiency & productivity of organisation and improves moral. There training motivates the employee and leads to better wage growth rate.

so, when productivity of organisation increases due to imparting training to its employees, it leads to positive NPV

There are basically two types of training -

1. General Training - creation of skill that is equally valuable in various entities & organisation
2. Specific training - This training is entity or organisation specific

Companies decides which training should be imparted to workers in order to make their NPV positive.