Present Value Analysis
Present value analysis reduces a projected stream of future damages to a single lump sum equivalent in today's dollars, accounting for the time value of money and expected growth of the underlying cash flows.
When it is used
Present value analysis is used to express future lost earnings, lost household services, and future medical/non-medical care in a single lump sum for trial or settlement purposes.
Step-by-step
- Project the nominal cash flow stream (wages, benefits, care costs) over the relevant horizon
- Select a discount rate (often Treasury-based) matched to the horizon
- Apply expected growth rates or a net discount rate to the projection
- Compute the present value by discounting each period back to the valuation date
- Document all assumptions so alternative calculations can be performed
Data sources
- U.S. Treasury yield curves
- BLS Employment Cost Index
- Historical wage growth series
- BLS Consumer Price Index, Medical Care component, for healthcare costs
Limitations
Results are sensitive to the discount rate, growth rate, and horizon assumptions. Sensitivity analysis is a standard practice in forensic economics.
Admissibility
Present value methodology is fundamental to forensic economics and well accepted (Jones & Laughlin Steel Corp. v. Pfeifer, 462 U.S. 523 (1983)). Disputes are typically over input choices rather than methodology.
Frequently Asked Questions
What is a net discount rate?
The net discount rate is the difference between the discount rate and the growth rate, often applied in a single step to simplify present value computation when the two rates move together.
How does jurisdiction affect discount rate selection?
Some jurisdictions specify a discount rate by statute or case law (e.g., Pennsylvania's 'total offset' approach; Kaczkowski v. Bolubasz, 491 Pa. 561 (1980)). Jurisdictional rules should be identified early.
References
- Jones & Laughlin Steel Corp. v. Pfeifer, 462 U.S. 523 (1983). supreme.justia.comCase Law
- Kaczkowski v. Bolubasz, 491 Pa. 561, 421 A.2d 1027 (1980). law.justia.comCase Law
- U.S. Bureau of Labor Statistics. (n.d.). Consumer Price Index: Medical care [Fact sheet]. U.S. Department of Labor. bls.govGovernment
- U.S. Bureau of Labor Statistics. (n.d.). Employment cost index (ECI). U.S. Department of Labor. bls.govGovernment
- U.S. Department of the Treasury. (n.d.). Daily Treasury par yield curve rates. home.treasury.govGovernment
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