Discount Rate
Definition
The rate used to convert future projected cash flows to their present value. It reflects the time value of money and the riskiness of the projected stream. Because small changes in the discount rate have large effects on the present value over long projection periods, it is one of the most contested inputs in damages calculations.
- Function
- Converts future cash flows to present value
- Reflects
- Time value of money and stream riskiness
- Sensitivity
- Large present-value effect over long horizons
- Field
- Damages quantification
Common questions
Why is the discount rate so heavily contested in damages disputes?+
Because present value is highly sensitive to the rate chosen, especially over multi-year or multi-decade projection periods, opposing experts often argue for materially different rates to push the final damages figure up or down without changing the underlying cash-flow projections.
What factors go into selecting an appropriate discount rate?+
The riskiness of the specific cash-flow stream, comparable companies' cost of capital, and whether the projection is pre-tax or post-tax all inform the choice, and the rate should match the risk profile of what is actually being discounted.
Related terms
- Avoided Costs
- The costs the claimant did not incur because the wrongful conduct interrupted operations. In a lost-profits calculation, avoided variable costs are deducted...
- But-for Scenario
- The hypothetical financial position the claimant would have been in had the wrongful conduct not occurred. The damages figure is the difference...
- Diminution in Value
- The reduction in the market value of a business or asset attributable to the defendant's conduct. Used when lost profits are not...
- Lost Profits
- The net income the claimant would have earned during the damages period but for the defendant's wrongful conduct. It focuses on the...
- Unjust Enrichment
- A damages measure that focuses on the benefit the defendant gained from the wrongful conduct rather than the loss the claimant suffered....