Individual circumstance in the stream of lost earnings is another criterion for the expert to consider, especially if the lost earnings stream historically had risk elements. For example, if the plaintiff’s past earnings were derived in part from stock options, then an analysis of the company’s stock price changes would be warranted and require a discount rate that reflects greater risk.
Similarly, if the injured person owned a company and derived earnings in the form of salary and profits, then the expert should select a discount rate that reflects the weighted average cost of capital (WACC) of the enterprise to match the risk facing the plaintiff’s past earnings stream. In such cases, for example, using the capital asset pricing model (CAPM), the expert might reasonably choose a discount rate of 10%, 15%, or even more.
The role of the expert is to assist the trier of fact, not to become an advocate for one side or another. Choosing a very low discount rate can increase the damages estimate considerably. While the forensic accountant has the capacity to alter damages by subjectively choosing a favorable discount rate for their client, the expert needs to justify their selection. If records are produced which indicate the expert selects discount rates for the benefit of their client, the expert’s credibility will be impacted.