Glossary of Terms

appraisal. A method of determining the value of the plaintiff’s claim on an earnings stream by reference to the market values of comparable earnings streams. For example, if the plaintiff has been deprived of the use of a piece of property, the appraised value of the property might be used to determine damages.

avoided cost. Cost that the plaintiff did not incur as a result of the harmful act. Usually it is the cost that a business would have incurred in order to make the higher level of sales the business would have enjoyed but for the harmful act.

but-for analysis. Restatement of the plaintiff’s economic situation but for the defendant’s harmful act. Damages are generally measured as but-for value less actual value received by the plaintiff.

capitalization factor. Factor used to convert a stream of revenue or profit into its capital or property value. A capitalization factor of 10 for profit means that a firm with $1 million in annual profit is worth $10 million.

compound interest. Interest calculation giving effect to interest earned on past interest. As a result of compound interest at rate r, it takes (1 + r)(1 + r) = 1 + 2r + r2 dollars to make up for a lost dollar of earnings 2 years earlier.

constant dollars. Dollars adjusted for inflation. When calculations are done in constant 1999 dollars, it means that future dollar amounts are reduced in proportion to increases in the cost of living expected to occur after 1999.

discount rate. Rate of interest used to discount future losses.

discounting. Calculation of today’s equivalent to a future dollar to reflect the time value of money. If the interest rate is r, the discount applicable to 1 year in the future is:

discount rate = 1/(1 + r).

       The discount for 2 years is this amount squared; for 3 years, it is this amount to the third power, and so on for longer periods. The result of the calculation is to give effect to compound interest.

earnings. Economic value received by the plaintiff. Earnings could be salary and benefits from a job, profit from a business, royalties from licensing intellectual property, or the proceeds from a one-time or recurring sale of property. Earnings are measured net of costs. Thus, lost earnings are lost receipts less costs avoided.

escalation. Consideration of future inflation in projecting earnings or other dollar flows. The alternative is to make projections in constant dollars.

expectation damages. Damages measured on the principle that the plaintiff is entitled to the benefit of the bargain originally made with the defendant.



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