TEA.7.1

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The Net Discount Rate: Logical Relations Among Present Value Variables

Skoog, Gary R. and Gerald D. Martin. 2005. “The Net Discount Rate: Logical Relations Among Present Value Variables.” The Earnings Analyst 7: 1-14.

Description

Six economic variables or subsets thereof appear as sub-opinions or assumptions in forensic economists’ reports. While the net discount rate (NDR) is the key variable, it is typically not primitive; rather, it is typically derived from two or three of the other five variables, defined here as the nominal discount rate ( R ), the real discount rate ( r ), the nominal wage growth rate (G), the real wage growth rate (g), and the increase in prices, or inflation (pi). While some equations connecting these six variables are well known, this paper systematically studies all of the possible interdependencies, providing 12 binary equations in which a variable is determined by two other of the variables, and 12 tertiary equations, in which a variable requires that three of the six variables be specified. These equations permit the construction of a spreadsheet which allows the forensic economist to quickly check an opposing expert’s opinions for internal consistency, to calculate the remaining variables from the stated assumptions or opinions (if possible), and, if impossible, to understand the under specification.

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