Adjustments for Present Value and Future Inflation

The concept of "present value" is derived from the fact that any given sum of money has the capacity (if properly invested) to earn additional money over time. Indeed, it is this inherent earning power of money that gives rise to the requirement in most jurisdictions that "present value" adjustments must be made in every situation where damages representing future pecuniary losses are awarded. Part I of this lesson is designed to explain why certain types of damage awards must be adjusted to their "present value," and to demonstrate precisely how those adjustments are actually calculated. The lesson also examines a variety of individual factors that should be taken into consideration in performing various types of "present value" adjustments. This lesson is intended for those students who already have a good working knowledge of the concept of pecuniary damages, including the various individual components of such damages, as well as how they are measured.

Part II of this lesson addresses the related concept of adjusting future pecuniary damage awards to account for the potential effects of future economic inflation. This portion of the lesson examines in detail three specific methodologies for making such adjustments that were expressly articulated by the U.S. Supreme Court in its decision in Jones & Laughlin Steel Corp. v. Pfeifer, 462 U.S. 523, 76 L. Ed. 2d 768, 103 S. Ct. 2541 (1983).

This lesson is considerably longer than most CALI lessons, as it really contains two distinct portions, either of which can be completed separately, or at different sittings. However, the lesson as a whole is designed to be completed in its entirety, since adjustments to any future pecuniary damage award generally must take into account both the concept of "present value" as well as that of future inflation.

Students who are unfamiliar with any of the basic underlying damages concepts that are addressed in this lesson should consult subject-specific CALI lessons on damages before proceeding with this lesson. Finally, it should also be noted that although this lesson does address a number of specific mathematical formulas by which present value and related future inflation adjustments are made, students need not possess any high level of mathematical or computational skills beyond the most basic math proficiency to successfully complete this lesson.

Learning Outcomes

On completion of the lesson, the student will be able to:

1. Define the term present value.
2. Explain the meaning of each variable in the formula PV = FV x 1/(1 + r)n used to calculate present value.
3. Explain the concept of the time value of money.
4. Discuss the rationale for making present value adjustments of future pecuniary losses.
5. Define the term future earnings.
6. Explain the importance of calculating the present value of a future income stream.
7. Discuss the general guidelines for making present value adjustments to damage awards.
8. Define price inflation, as the term is used to determine adjustments for future inflation.
9. State the importance of the Supreme Court decision in Jones & Laughlin Steel Corp. v. Pfeifer on making adjustments to any damage award.
10. Analyze the three different methodologies from Jones & Laughlin Steel Corp. v. Pfeifer that can be used to adjust any future pecuniary damage award.