The Discount Rate ‘Controversy’ – Much Ado About Nothing Part 1

The Discount Rate ‘Controversy’ – Much Ado About Nothing Part 1

By George A. Jouganatos, Ph.D.

Often in litigation matters involving economic damages, opposing counsel and opposing experts attack the figure used, by their opponent, for the discount rate in present value computations. The higher the (net) discount rate, the lower the present value of lost income.

As a hypothetical example, suppose the lost annual income is $20,000, worklife remaining is 10 years, wage growth is 3% annually, and the discount rate is 5%. The present value of lost income is $175,652. If the discount rate is 6%, then the present value of lost income becomes $170,604.Business_Finance_14079

In employment, personal injury and wrongful death matters, whether for the plaintiff or defense, I have been using, for seventeen years, a historic average of three-month Treasury Bills. I also have been using a historic average for the wage growth rate. The net discount rate (discount rate minus wage growth rate) that I use has been typically under 1.5.

Using the yield of United States’ Treasury securities is necessary because they are default risk free. Using some historic average is justified to smooth out cyclical fluctuations.

About George Jouganatos, Ph.D.

Professor of economics for over 18 years, taught economics, finance, and quantitative analysis at UC Davis and Santa Cruz, California State University, Sacramento, and University of San Francisco. Has written many economic impact, efficiency, cost, and feasibility studies; designed economic models, strategic plans, and performance measures. Has written and conducted seminars in the field of economics of development, political economy, economic history, environmental economics, public policy, operational analysis, and economic modeling and forecasting. Over 25 years of consulting services providing economic and statistical analysis for the private and public sectors. Specialties include, but not limited to, personal injury, wrongful death, wrongful termination, housing discrimination, employment discrimination, economic loss, business valuations, lost profits, divorce, general economic and public finance issues. Consultation and testimony for numerous attorneys in California, New York, Nevada, Iowa, Montana, British Columbia, Oregon, New Mexico, and Hawaii. Expert witness and article contributor for www.ForensisGroup.com

One Response to “The Discount Rate ‘Controversy’ – Much Ado About Nothing Part 1”

  1. Gosh, I wish I would have had that infmortaoin earlier!