Present value converts a projected stream of future losses into the single sum that, invested today at a stated rate, would replace those losses as they come due. The economist selects a discount rate matched to the horizon and to the kind of stream being valued, states how it interacts with the growth rate applied to the loss stream, and shows the arithmetic so the result can be reproduced.
Every damages report that projects losses beyond the trial date reduces them to present value: future lost earnings, lost household services, the cost of a life care plan, lost financial support in a wrongful death claim, and future lost profits. The step is required because an award is paid once, in present dollars, while the losses it replaces would have been received over many years.
The present value of a long stream is sensitive to the spread between the growth and discount rates, and small changes compound over decades. A rate chosen from a short window of unusual market conditions can overstate or understate the result, so the report should say which period the rates were drawn from and why. Present value does not resolve disputes about the underlying stream: if the earnings projection or the worklife horizon is wrong, discounting a wrong stream correctly still yields a wrong number. The rate convention also has to match the stream: a low-risk yield applied to a commercial lost-profits projection treats an uncertain profit stream as if it were as certain as wages and overstates the loss, while a risk-adjusted rate applied to a personal earnings stream understates it, so the report says which convention it follows and why.
Reduction of future losses to present value is a long-accepted step in federal and state courts, and the Supreme Court has treated the choice among discounting approaches as a matter for the trier of fact provided the economist explains the assumptions. Challenges usually target inputs rather than the method: an unexplained rate, a growth rate inconsistent with the discount rate, or a failure to follow a venue's stated convention. Some jurisdictions direct a total-offset approach by case law, under which growth and discounting are assumed to cancel; the net versus gross discount rate comparison explains the alternatives.
A lower rate assumes the award will earn less when invested, so a larger sum is needed today to fund the same future losses. The relationship is mechanical, which is why the source and the period of the rate matter more than the rate itself.
Within a personal-loss claim, yes: the discount rate reflects the return on the safely invested award and does not change between the earnings, household services, and medical cost streams. What changes is the growth rate applied to each stream, since wages, household replacement costs, and medical costs grow at different rates, so the net rate differs by category even when the discount rate is the same. A commercial lost-profits stream is the exception: it is discounted at a rate that reflects the risk of the projected profits rather than at the low-risk yield.
Discounting runs from the trial date forward only. Losses that accrued between the event and trial are tabulated year by year in the dollars of each year, and where the governing framework allows, prejudgment interest carries them forward to the trial date on a separate line, so the two adjustments are never confused.
Request a consultation on Present Value and Discounting or call (201) 343-0700. Plaintiff and defense counsel.