You have been hired by an attorney to perform an economic analysis of lost wages in a wrongful death suit. The case involves an insurance agent, John Doe, who was killed in an auto accident a few days after his 59th birthday. Mr. Doe could have expected to earn $75,000 this year. Data suggest that the income of insurance agents has risen an average of 6% over the past 20 years. Mr. Doe's expected retirement age was 65, i.e., on his 65th birthday. Available data provide the mortality rates given below for individuals of Mr. Doe's sex and occupation at various ages. Ten percent appears to be the appropriate discount rate.
a. Calculate the present discounted value of Mr. Doe's expected earnings stream. (For simplicity, assume he receives all of his earnings for the preceding year on his birthday.)
b. The attorney has asked your advice regarding a minimum figure that should be accepted as an out-of-court settlement. What guidance can you give the attorney? Would additional information allow you to give the attorney a more precise estimate of the figure that should be accepted? Give an example of how more information would help.
c. You must be prepared for cross-examination by the defendant's attorney. Where would you expect the opposing attorney to attack your testimony?

Question

You have been hired by an attorney to perform an economic analysis of lost wages in a wrongful death suit. The case involves an insurance agent, John Doe, who was killed in an auto accident a few days after his 59th birthday. Mr. Doe could have expected to earn $75,000 this year. Data suggest that the income of insurance agents has risen an average of 6% over the past 20 years. Mr. Doe's expected retirement age was 65, i.e., on his 65th birthday. Available data provide the mortality rates given below for individuals of Mr. Doe's sex and occupation at various ages. Ten percent appears to be the appropriate discount rate.

a. Calculate the present discounted value of Mr. Doe's expected earnings stream. (For simplicity, assume he receives all of his earnings for the preceding year on his birthday.)
b. The attorney has asked your advice regarding a minimum figure that should be accepted as an out-of-court settlement. What guidance can you give the attorney? Would additional information allow you to give the attorney a more precise estimate of the figure that should be accepted? Give an example of how more information would help.
c. You must be prepared for cross-examination by the defendant's attorney. Where would you expect the opposing attorney to attack your testimony?

radhika tangri · Accepted Answer

Final Answer :

a.

a. b.The attorney would be foolish to insist upon $350,985.59, since there is some uncertainty regarding the outcome of the case. Clearly, it is appropriate to accept a somewhat smaller settlement. How much smaller would depend upon the probability of winning the case. If the attorney assigned a 0.9 probability of winning the case with the full settlement, the appropriate offer would be 0.9 times the estimated loss. 0.9 × 350,985.59 = 315,887.03 Obviously, as the probability of winning falls, the out-of-court settlement falls with it. c.The defendant's attorney could be expected to attack the validity of the assumptions that have been made in preparing the estimated lost income. Assuming that the mortality figures come from an objective source, there are two main assumptions contained in the report. We must make an assumption regarding growth in Mr. Doe's earnings, and we must also make an assumption for the interest rate. The defendant's attorney could be expected to argue for a lower growth in earnings and a higher discount rate.

b.The attorney would be foolish to insist upon $350,985.59, since there is some uncertainty regarding the outcome of the case. Clearly, it is appropriate to accept a somewhat smaller settlement. How much smaller would depend upon the probability of winning the case. If the attorney assigned a 0.9 probability of winning the case with the full settlement, the appropriate offer would be 0.9 times the estimated loss.
0.9 × 350,985.59 = 315,887.03
Obviously, as the probability of winning falls, the out-of-court settlement falls with it.
c.The defendant's attorney could be expected to attack the validity of the assumptions that have been made in preparing the estimated lost income. Assuming that the mortality figures come from an objective source, there are two main assumptions contained in the report. We must make an assumption regarding growth in Mr. Doe's earnings, and we must also make an assumption for the interest rate. The defendant's attorney could be expected to argue for a lower growth in earnings and a higher discount rate.

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