Page 19 - Economic Damage Calculations

In the context of an economic damages computation, the time during which economic harm is experi-
enced is often referred to as the damage period. The damage period is defined not only by the judgment
of the expert, but also by factors such as applicable law, any contractual arrangements between the dis-
puting parties, the documentary case evidence, witness statements, and market or product research. The
damage period may range from a relatively short time frame to, in some situations, perpetuity.

Given the effect of the compounding of discount rates, the length of the damage period may be an im-
portant factor to consider in selecting a rate or rates for a present value determination. Some experts
have used multiple debt instruments, with different maturities for cash flow amounts from different time
periods. As an illustration, this may result in a 1-year treasury rate for damages in one time range in a
damages calculation and a 5-year treasury for another time range in the calculation. Others have used a
rate from one security to be applied to the cash flow stream uniformly. As an example, an expert may
use a 3-year security to discount all periods in a 5-year damage period. Each of these two general ap-
proaches has been accepted by courts.

Summary of Factors Considered by Discount Rates

In summary, the amount that a buyer is willing to pay for a business, an asset, or a stream of income, or that a
plaintiff should be awarded to replace such an item, is a function of a number of factors, including

 the expected cash flow or income stream (taking into account the risk of achievement), fn 7

 the degree of penalty for risk of variability in returns,

 the timing of the cash flow or income stream, and

 the risk-free rate of return.

fn 7 In the context of litigation, considerable debate is focused on a plaintiff’s "expected" results but for the defendant.

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