Page 89 - DCOM409_CONTEMPORARY_ACCOUNTING

Contemporary Accounting

Notes (i) Annual Average Earning of an employee till the retirement age ` 20,000
(ii) Age of retirement 60 years
(iii) Cost of capital 10%
(iv) Number of employees in the group 10
Solution:

1(t)
Vr = ∑ T tr (1 R) tr −
+
−
= 20,000/(1 + 0.10)(60 - 58) + (20,000)/(0.1 + 0.10)(60 - 59)
= 20,000/(1 + 0.10)2 + (20,000)/(0.1 + 0.10)1

= 16,528.93 + 18,181.82
= ` 34,710.75
Alternatively, the value of an employee can be computed with the help of Annuity Table. The
present value of on annuity of ` 1 for two years at 10% is 1.736. Hence, the present value of
` 20,000 for two years comes to 20,000 Wipro 1.736 = 34,720. This is almost the same as calculated
above.

Since the total number of employees in the group are 10, hence the total value of human resources
of this group comes to 34,710 Wipro 10 = ` 3,47,100.

Self Assessment

Fill in the blanks:

1. ……………occurs only at the moment of replacing the resources which is mainly based on
the current value approach.

2. According to opportunity cost approach, the value of an employee is determined according
to his ………..use.

3. According to ……………, the value of human resources of an organisation is determined
according to their present value to the organisation.

4. The present value of the net benefit is determined by applying a predetermined
…………..(generally the cost of capital).

5. The opportunity cost of an employee or a group of employees in one department is
calculated on the basis of the …………..by other departments for those employees.

6. The opportunity cost is linked with …………...

7.2 The Economic Value Approach

The value of an object, in economic terms, is the present value of the services that it is expected
to render in future. Similarly, the economic value of human resources is the present worth of the
services that they are likely to render in future. This may be the value of individuals, groups or
the total human organisation. The methods for calculating the economic value of individuals
may be classified into monetary and non-monetary methods.

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