Capital Budgeting Bachelor Essay

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Human resource programs often have no investment, thereby rendering useless capital budgeting indices, such as return on investment (which is the ratio of total returns to original costs). Hunter et al. gave two examples to illustrate their point. The first example involved a decision to replace a low-cutoff method of selection with top-down hiring, a change that yielded a substantial utility gain (e.g., Hunter & Hunter, 1984, 72-98).


They stated that, in both situations, no investment costs to the organization are incurred and therefore it is impossible to compute capital budgeting estimates of utility, such as return on investment.
To address this criticism, we must carefully define the concept of investment and then distinguish it from the cost concept more familiar to psychologists conducting utility analyses. To help clarify this distinction, we describe three types of alternative choice problems faced by managers who must decide on alternative courses of action within the human resource function (Anthony & Reece, 1983). The first type of alternative choice problem involves consideration of the costs of alternative courses of action. The second type of problem involves consideration of both revenues and costs. This is the problem that Hunter et al. (1988) described in their two examples. The third type of problem involves investment as well as revenues and costs. The capital budgeting model of utility proposed by Cronshaw and Alexander (1985) is congruent with this third type of alternative choice problem but not with the first two types.
Three key terms are incorporated into the preceding description of alternative choice problems: cost, revenu ...
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