In economic analysis, the concept of time value of money is considered a fundamental axiom: a self-evident truth that needs no further proof or explanation. It is the simple fact that in all but the most unusual circumstances, a dollar received today is worth more than a dollar received in the future. To some, this statement may be so obvious that it hardly merits further discussion, but our professional experience indicates wide disagreement among financial experts at times, leading to substantially different loss computations based on discount rate assumptions alone. As forensic accountants, we handle a large number of economic damage claims that are subject to present value calculations, and this post will present a basic overview of the term as well as some considerations in its application to litigation matters. (For the purposes of this article, we do not discuss discount rates that are used in business valuations and lost profit calculations, which are different.)
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