Present value is the single sum that, invested today at a stated rate, would replace a stream of future losses as they come due. The result depends on the loss stream, the growth rate applied to it, and the discount rate used to bring it back to the present. This guide explains each in plain terms, what a net rate and a gross rate are, what the total offset approach is, and how to read a present value schedule.
An award is paid once, in present dollars. The losses it compensates would have been received over many future years. A dollar received in ten years is worth less than a dollar received today, because a dollar today can be invested and grow. Present value is the arithmetic that makes the two comparable: it asks what sum, invested now on safe terms, would fund the projected future losses as each comes due. Without the step, future losses would be overstated by ignoring the return on the award, or understated by ignoring growth in wages and costs. The present value method page describes the mechanics.
The discount rate is the return the award is assumed to earn when invested. The mainstream basis is the yield on low-risk instruments, such as Treasury securities, with maturities matched to the horizon of the loss, because the award is meant to be invested safely rather than speculatively. A higher rate produces a smaller present value; a lower rate produces a larger one. The rate's source and the period from which it was drawn matter more than the rate itself, and a report should state both and show the result across a reasonable range.
Before discounting, each loss stream is projected forward at a growth rate appropriate to it. Wages grow with general wage inflation and, early in a career, with experience; household replacement costs grow with wages in the occupations that perform the work; medical costs grow at their own rate. The wage growth method page describes the series used. The growth and discount rates must be drawn on a consistent basis, both nominal or both real, and from comparable periods; a projection that grows losses at an optimistic rate and discounts them at an unrelated rate is inconsistent whichever way it cuts.
Some reports combine the two rates into a single net discount rate, the difference between growth and discount, applied to a loss stated in today's dollars. Others show the two steps separately, growing the stream into future dollars and then discounting at the full rate. The presentations are arithmetically equivalent when the assumptions are consistent, and the choice is about transparency and venue convention. The net versus gross discount rate comparison sets out when each is used.
Under the total offset approach the growth rate and the discount rate are assumed to cancel, so the present value equals the sum of future losses stated in today's dollars. Some jurisdictions direct that approach by case law; elsewhere it is one assumption among several and must be justified like any other. Other venues have their own conventions, such as a rate fixed by statute or by the court, or a requirement that past losses carry interest to the trial date. The economist follows the venue's rule, states it in the report, and where the rule is unsettled presents the result under each alternative. Counsel confirms the governing rule against primary sources.
A present value schedule shows, for each future year, the projected loss in that year's dollars, the discount factor applied, and the resulting present value, with the column totals giving the undiscounted and discounted sums. Read it with four questions: what growth rate produced the yearly figures and from what series; what discount rate and what instruments and period; are the two consistent; and what does the sensitivity table show at the ends of a reasonable range. The rebuttal guide applies those questions to an opposing report, and the guide to economic damages places the schedule within the full calculation.
Usually because of the spread between growth and discount, not the loss itself. A one-point difference in the net rate compounds over decades. The sensitivity table in each report shows how much of the gap the rate explains.
No. Past losses are stated in the dollars of the years they occurred and, where the framework allows, carried forward with interest to the trial date. Only future losses are discounted.
A structured settlement is a way of paying an award over time. Present value is the lump sum equivalent of a future stream. The two are related, and an annuity quote for a structure is one check on a present value calculation, but the economist's figure does not depend on how the award is ultimately paid.
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