Introduction to Valuation of Economic Damages

The majority of forensic accounting practice involves the valuation of some type of damages or value of a business. Economic damages are a salient service provided by forensic accountants. Lost wages/income are a persons expected wages/income, but-for the wrongdoing minus their actual wages/income during the damage period.

Lets look at the case of Harry, who is a successful dentist in Town X. Harrys practice has experienced the following net income over the most recent five years:

20X1 $145,000, 20X2 $156,000, 20X3 120,000, 20x4 $117,000, 20X5 $121,000.

On January 1, 20X6, Harry experienced an accident in which he fell and hit his head in the parking lot of a strip mall. Ever since the accident, he has suffered severe headaches and dizziness that he had not experienced in the past. As a result of these symptoms, Harry is unable to work. He expected to grow his income from his practice by about 10 percent a year. He has filed a lawsuit against the strip mall.

Harrys effective Federal & state tax rate (combined) is 35%.

Personal expenses are paid and deducted through the business. The personal expenses (perks) are 10% of net income.

The average rate of inflation from 20X1 20X5 is 3%.

Harrys attorney has hired you to prepare a measurement of economic damages resulting from the accident.

Based on the information available, identify with a logical argument (Toulmin recommended) which scenario is the best estimate of the damages at the end of year 1 of the loss:

Scenario	S-1	S-2	S-3	S-4	S-5	S-6
Description	3% Growth Perq's	10% Growth Perq's	3% Growth No Perq's	10% Growth No Perq's	-3.64% Growth Perq's	-3.64% Growth No Perq's
20X5	121,000	121,000	121,000	121,000	121,000	121,000
10% Perq's	12,100	12,100	0	0	12,100	0
20X5	133,100	133,100	121,000	121,000	133,100	121,000
Projected 20X6	137,093	146,410	124,630	133,100	128,255	116,596
Less 35% Taxes	-47,983	-51,244	-43,621	-46,585	-44,889	-40,808
Net Loss:	89,110	95,167	81,010	86,515	83,366	75,787