Future economic damages are expressed as the present value of future lost earnings, sometimes referred to as discounted future losses. The key issue is that dollars today and dollars in the future have different values. Specifically, most individuals, if offered the choice of a $1.00 today and a $1.00 at the end of one year, would choose the dollar today because it is more certain (less risk of nonpayment).
For example, if interest rates are 5.00% per year; this means we could invest the $1.00 today and at the end of a year have the original $1.00 plus $0.05 in interest, or $1.05 in one year, not just $1.00 we have now. This process is called accumulation and asks, “What is the future value (FV) of some amount of money (e.g. $1.00) invested today for a certain period of time with a known rate of interest (e.g. 5.0%)?” Discounting is related to accumulation but works in the opposite direction and asks, “What is the present value (PV) of some money promised in the future after a period of time?” As with accumulation, interest plays a key role in discounting.
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