Cost Approach to Value
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This chapter provides an overview of the basic logic and steps involved in applying the cost approach. The cost approach is based on the economic principle of substitution, which equates the value of human capital to the cost to create a substitute workforce of comparable utility. Costs considered in applying this valuation method to the assembled workforce pertain to recruitment, hiring, training, lost productivity and entrepreneurial return. An illustrative example is provided. Further considerations and refinements of the cost approach are elaborated in chap. 4. In addition to presenting the fundamentals of conducting the cost approach, this chapter discusses the conceptual reasoning and legal precedents that justify the cost approach as an acceptable, and actually preferred method for workforce valuations.