Present Value Of Future Earnings Research Articles

Estimating additional schooling and lifetime earning obtained from improved linear growth in low- and middle-income countries using the Lives Saved Tool (LiST).

BackgroundPolicymakers seeking to prioritize the use of restricted financial resources need to understand the relative costs and benefits of interventions for improving nutritional status. Improved linear growth can lead to increased education attainment and improved economic productivity in low- and middle-income countries (LMICs), though these non-health-related benefits are not reflected in current long-term modelling efforts, including the Lives Saved Tool (LiST). Our objective was to integrate the effects of improved linear growth on non-health related benefit into LiST by estimating subsequent gains in years of schooling and wage earnings. We then estimated the impacts of reaching the Sustainable Development Goals (SDGs) target for stunting in South Asian countries on lifetime productivity.MethodsIn the first step, we used LiST outputs to estimate the improved linear growth due to scaled-up nutrition interventions and used published estimates to quantify the education gain resulting from an increase in height for age z-score (HAZ). In the second step, we used published country-level estimates on economic returns to schooling to quantify the relative gains in wages that children born today will experience because of their additional education attainment in the future. In the last step, we used country-level data on wages to estimate the net present value of future earnings gained due to early childhood growth improvement per birth cohort.ResultsIf South Asia countries reach the SDG target by 2025, an estimated 8.6 million years of schooling will be obtained by six birth cohorts of 2020 to 2025. These six birth cohorts will also gain an estimated US$64 893 million in the present value term, at a 5% discount rate, in lifetime earnings. India has the largest expected gain in years of schooling (7367 years) and lifetime earnings (US$59 390 million in present value terms, at a 5% discount rate).ConclusionsTwo non-health-related benefits of improved linear growth – additional years of schooling and lifetime earnings – are added in LiST. Together with LiST costing, users can now conduct both cost-effective and benefit-cost analyses. Using both analyses will provide more comprehensive insights into nutrition interventions' relative costs and benefits.

Career and education choice as central elements of long- term financial planning

Career and education choice play a central role in individual’s long-term financial planning. In defining individual’s overall wealth, we not only consider the financial wealth (net worth), but also incorporate individual’s human capital (expressed as the present value of future earnings) as a com- ponent of the wealth function. We demonstrate that human capital accounts for the majority of an individual’s wealth portfolio in most cases for most of individual’s life. By including human capital in the traditional theoretical portfolio choice framework, we show that the choice of career and edu- cation level has a significant effect on the Sharpe ratio of an individual’s overall wealth portfolio. We conclude by providing several examples of the computations of the present values of future aver- age earnings streams for individuals of various education levels from several different occupations. The calculations are meant to illustrate how an individual can perform a simple NPV-like analysis when in the process of career planning.

Modelling the Economics of Grassland Degradation in Banni, India, using System Dynamics

This is a study of the interactions between the ecology and economy of the Banni grassland, located in the district of Kutch, Gujarat, India. The study focuses on modelling the economic impact of grassland degradation in the Banni from 1992–2015 and simulates future scenarios up to 2030 using system dynamics. The specific sectors being modelled are the area spread of the invasive species Prosopis juliflora, palatable grass, the populations of livestock as well as the livestock and charcoal incomes of Banni. An economic valuation is done by discounting the future earnings of the pastoral (milk, livestock sale, dung manure) and charcoal economy under two scenarios 1) Base case (Business as Usual), i.e. keeping current policies constant and 2) P. juliflora removal policy (PRP) i.e. where a decision is implemented to remove P. juliflora from Banni. Under the BAU scenario, modelling results indicate that the Banni grassland is headed for severe fodder scarcity due to the shrinking area under grassland. Under the PRP scenario, Banni is able to revive its grasslands and increase the present value of future earnings (up till 2030) by 62 per cent. A delay of five years in the decision to remove P. juliflora results in a 28 per cent reduction in earnings indicating the policy’s time sensitivity. The model serves as a test bed for generating what-if scenarios of the Banni grassland.

What is the Economic Value of Improved Labor Market Outcomes from Infant Nutrition?: The Case of Breastfeeding in the United States

We seek to estimate the effects of breastfeeding on the present value of future earnings increases resulting from IQ increases. Using new estimates of the effect of cognitive performance on lifetime earnings in the United States, based on the National Longitudinal Survey of Youth, developed by Lin, Lutter, and Ruhm (2016) and new baseline estimates of the present value of lifetime earnings following methods of Grosse et al. (2002), we find that the expected value of increases in the present value of lifetime earnings from breastfeeding is about $20,000, assuming a 3 percent discount rate, with a 95 percent confidence interval from $2,900 to $38,700. If half of all US infants born each year were better breastfed, we estimate the total increase in the present value of future earnings to be $40 billion annually.

LIMITATIONS IN THE USE OF INCOME APPROACH TO COST VALUATION OF A COMPANY

The deteriorating economic situation in Ukraine, high inflation, valuation of a company and its assets is complicated. Multiple occasions of the need to assess the company necessitate right choice of the approach to its valuation. The purpose of the article consists in the synthesis and analysis of existing theoretical and applied aspects of the application of income approach to valuation of the company to determine advantages and disadvantages of its use in current economic conditions in Ukraine. In difficult economic situation of Ukrainian economy, stock market immaturity, lack of public information about purchases and sales of companies the question of the optimal choice of approach to the assessment of company value that would have a high level of reliability is raised. As a result of theoretical analysis of the essence of income approach to company valuation it is stated that the value of the company according to this approach is the determination of the present value of future earnings of the company on a retrospective basis in relation to the risks that will bring further economic activity of the company, or the income that will be obtained if the company will be sold. The research of information sources needed for the assessment by income approach allows to conclude that on the basis of public information on macroeconomic indicators of the development of the country, the region, the industry it is difficult to determine the value of the company with high accuracy. The analysis of the main methods of assessment of company value according to income approach allows to formulate the main advantages, disadvantages and limitations in applying the method of direct capitalization and the method of discounted cash flow. It is determined that for high reliability of the forecast of future business income a relative stability of company activity and the environment in which it operates are necessary. In the conditions of underdevelopment of Ukrainian stock market, the absence of public information about the sale and purchase market, mergers and acquisitions, the instability of the overall macroeconomic situation in the country using income approach is not appropriate. A further area of research is to determine the optimal approach and methods that can help to determine the value of the company with high reliability on the basis of limited public information and significant fluctuations in macroeconomic development of the country.

The information content of permanent versus transitory earnings: UK evidence

This study examines whether UK investors perceive permanent earnings to be different from transitory earnings. Specifically, the current study investigates the relative informativeness (measured by earnings response coefficient) of permanent earnings compared to transitory earnings. The study uses a contextual model (of the relation between stock returns and accounting earnings) with a dummy variable approach that allows parameter shifts for firm-years having transitory earnings. The results of the study indicate that the earnings response coefficient is significantly positive for permanent and transitory earnings. However, the earnings response coefficient is significantly higher for permanent earnings compared to transitory earnings. These results are consistent with US findings and suggest that permanent earnings have more information content than transitory earnings. The results of this study could reflect two different things if we think about a standard model in which price is the present value of future earnings: i) a given level of earnings will have greater implications for future earnings if the earnings are permanent, causing a larger stock price response; ii) firms with more volatile earnings could be riskier, and, therefore the discount rate would be higher.

Reaching Economies of Scale to Be a Viable Ongoing Entity

This paper empirically considers economies of scale that firms must reach to be considered viable ongoing entities. These are estimated from the selling prices of actual firms in two broad industries — service and manufacturing. For service firms, the minimum size is $10 million in annual revenues and for manufacturing firms, it is smaller at $6 million in sales to reach economies of scale. Traditional economic theory considers firms becoming more efficient with increasing size until they reach an optimal economy of scale. Until they reach that size, we show that they cannot be considered truly ongoing firms and cannot be valued directly as the present value of future earnings. When firms are also independent of their owner/manager, we consider that a viable ongoing entity exists.

Economic analysis of the use of facemasks during pandemic (H1N1) 2009

A large-scale pandemic could cause severe health, social, and economic impacts. The recent 2009 H1N1 pandemic confirmed the need for mitigation strategies that are cost-effective and easy to implement. Typically, in the early stages of a pandemic, as seen with pandemic (H1N1) 2009, vaccines and antivirals may be limited or non-existent, resulting in the need for non-pharmaceutical strategies to reduce the spread of disease and the economic impact. We construct and analyze a mathematical model for a population comprised of three different age groups and assume that some individuals wear facemasks. We then quantify the impact facemasks could have had on the spread of pandemic (H1N1) 2009 and examine their cost effectiveness. Our analyses show that an unmitigated pandemic could result in losses of nearly $832billion in the United States during the length of the pandemic. Based on present value of future earnings, hospital costs, and lost income estimates due to illness, this study estimates that the use of facemasks by 10%, 25%, and 50% of the population could reduce economic losses by $478billion, $570billion, and $573billion, respectively. The results show that facemasks can significantly reduce the number of influenza cases as well as the economic losses due to a pandemic.

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Discussion

The Informational Content Of Voluntary Embedded Value (EV) Financial Disclosures By Canadian Life Insurance Companies During The Recent Period Of Market Turmoil

The informational content and relevance to external stakeholders of voluntary financial disclosures by commercial banks is now becoming more widely recognized. For instance, banks voluntary disclosures of liquidity, interest rate and market risk metrics have been found to be closely associated with market value of equity and credit ratings. So far, there has been very scarce published research on investigating the informational content and relevance to external stakeholders of voluntary financial disclosures by life insurance companies during the recent period of market turmoil. In order to improve upon this situation, this paper updates previous findings and reports on the informational content of voluntary embedded value (EV) financial disclosures by Canadian life insurance companies during the 2000-2010 time period. As opposed to traditional statutory balance sheet and earnings reporting, EV voluntary disclosure attempts to estimate the present value of future earnings generated by a life insurers current book of various insurance businesses. The preliminary results presented in this study indicate that recent EV voluntary financial disclosures failed to communicate intrinsic informational content and to provide value relevance to external stakeholders in the sense that they were not found to be closely associated with life insurers market value of equity and credit ratings during the recent 2007-2010 period of market turmoil.

The Informational Content Of Voluntary Embedded Value (EV) Financial Disclosures By Canadian Life Insurance Companies

The informational content and relevance to external stakeholders of voluntary financial disclosures by commercial banks is now becoming more widely recognized. For instance, banks voluntary disclosures of liquidity, interest rate and market risk metrics have been bound to be closely associated with market value of equity and credit ratings. So far, there has been very scarce published research on investigating the informational content and relevance to external stakeholders of voluntary financial disclosures by life insurance companies. In order to improve upon this situation, this paper studies and reports the informational content of voluntary embedded value (EV) financial disclosures by Canadian life insurance companies. As opposed to traditional statutory balance sheet and earnings reporting, EV voluntary disclosure attempts to estimate the present value of future earnings generated by a life insurers current book of various insurance businesses. The preliminary results presented in this study indicate that EV voluntary financial disclosures communicate intrinsic informational content and provide value relevance to external stakeholders in the sense that they were found to be closely associated with life insurers market value of equity.

Mean Reversion in Net Discount Ratios: A Study in the Context of Fractionally Integrated Models

AbstractThis article introduces a new alternative to the ongoing debate about stationarity and mean reversion of the net discount ratio. Modeling the net discount ratio as a fractionally integrated (I(d)) process, we apply recently developed frequency domain estimation procedures and find evidence that the net discount ratio is an I(d) process with 1/2 ≤d < 1. Although nonstationary, such series behave like stationary processes in one interesting respect; they are mean‐reverting. We present results from a simulation experiment suggesting that the finding of a nonstationary, but mean‐reverting net discount ratio generally supports the validity of current practice in estimating economic damages in personal injury litigation. Moreover, if recognized and accounted for, the presence of long memory in the net discount ratio even offers the potential to significantly improve forecasts of the present value of future earnings.

Risk, Discounting, and the Present Value of Future Earnings

Abstract No abstract available.

Accounting for Age-Earnings Profiles in Net Discount Rates

Abstract No abstract available.

The Economic Burden of Affective Disorders

This paper summarises the methods and sources of data used to estimate costs of affective disorders and presents the results. A timing model employing regression analysis was developed to estimate morbidity costs. This model measures the lifetime effect on current income of individuals with affective disorders, taking into account the timing of onset and the duration of these disorders. Affective disorders imposed an estimated US$ 20.8 billion burden in 1985 and US$ 30.4 billion in 1990 in the US. Affective disorders represent 21% of the costs of all mental illnesses. Direct treatment costs comprised 58.4% of the total in 1985; morbidity costs, 8.1%; mortality costs, the present value of future earnings lost due to premature mortality, 28.9%, based on a 6% discount rate; and other related costs, including the cost of crime, lost productivity due to incarceration, and caregiver services, 4.6%. Private sources account for 49% of the total direct expenditures for treatment of persons with affective disorders; state and local funds, 26%; and federal funds, 25%. In light of the high burden of affective disorders on societal resources, more attention should be directed at comprehensive, research-based strategies to reduce the prevalence of these disorders in the United States.

Are Net Discount Rates Stationary?: The Implications for Present Value Calculations: Comment

Introduction In a recent article in this Journal, Haslag, Nieswiadomy, and Slottje (1991) present evidence that the nonlinear net discount ratio over the 1964 through 1989 period is a stationary series. This is an important finding, since it implies not only that a stable relationship exists between the growth rate of wages and interest rates, but also that valid inferences about the population moments of the distribution of the net discount ratio can be drawn from these data. As a result, historical averages of the net discount rate can be used confidently to estimate the present value of future earnings.(1) Although Haslag, Nieswiadomy, and Slottje do examine the robustness of their results to changes in the interest rate, they do not examine robustness with respect to changes in the form of the unit root test. As pointed out by Campbell and Perron (1991), the outcomes of unit root tests are often quite sensitive to the specification of the tests. In this comment, we reexamine the time series properties of the nonlinear version of the net discount ratio and find that the results of Haslag, Nieswiadomy, and Slottje are critically dependent upon the specification of the unit root test they performed. In particular, we find that their tests fail to adequately eliminate the serial correlation from the residuals. Moreover, once we eliminate the serial correlation from these tests, we fail to reject the null hypothesis of a unit root for all of the net discount ratios tested. A unit root process is essentially a time series process that experiences a random change in its mean every time period. The standard augmented Dickey-Fuller procedure tests whether a time series has a constant mean or a mean that changes randomly with each new observation. Under certain circumstances, this battery of tests will falsely suggest that a series is a unit root process. In particular, as demonstrated by Perron (1990), it is possible to misidentify a time series that has a one-time shift in its mean as a unit root process even though it is stationary around its two separate means. This distinction is important for forecasting purposes. In the case of a unit root process, all of the information that is relevant for forecasting is contained in the most recent observation. In the case of a series that is stationary around a one-time shift in its mean, all of the observations made since the mean shift contain information about the possible future path of the series. Although our augmented Dickey-Fuller tests appear to indicate the presence of a unit root in the net discount ratio, the graphical evidence suggests that there was a substantial shift in the mean of the series during the period 1977 through 1981. As a result of this mean shift, these tests might incorrectly identify the net discount ratios to be unit root processes. To investigate this possibility, we employ the procedure recommended by Zivot and Andrews (1992), which tests the null hypothesis of a unit root against the alternative hypothesis that the series is stationary around a one-time shift in its mean. Using this test, we reject the unit root hypothesis in favor of the alternative of a one-time mean shift for all of the net discount ratios tested. Our results indicate that the nonlinear version of the net discount ratio is a nonstationary series over the entire 1964 through 1989 time period. However, the source of nonstationarity appears to be a one-time shift in the mean of the series. Once the shift in the mean is removed, the net discount ratio becomes stationary. The most important implication of this finding is that the optimal forecast for the net discount ratio is not its grand mean over the 1964 through 1989 time period, but rather the mean since its last shift. Data, Methodology, and Results Following Haslag, Nieswiadomy, and Slottje, we first construct four net discount ratios using monthly data on the growth rate of the real average hourly wage in the private nonagricultural sector and the ex post real return on four different Treasury security maturities. …

Life Insurance as an Offset to Economic Loss in Wrongful Death Cases: A Note

Abstract No abstract available.

The Present Value of Future Earnings: Contemporaneous Differentials and the Performance of Dedicated Portfolios

Introduction Anderson and Roberts (A-R) (1989) offer evidence regarding the estimation of the present value of a worker's stream of future earnings. A-R addressed the issue of identifying the appropriate differential between the rate (r) at which the earnings stream should be discounted and the rate of growth (g) of that earnings stream. They concluded . . . that a benchmark after-tax net discount rate [i.e., (r-g)] of -0.5 percent would be appropriate for assessing awards for lost earnings for most cases. (p. 64). Bryan and Linke (B-L) (1988) reached a similar conclusion. Specifically, B-L investigated the use of portfolios of alternative composition, but with each dedicated to the replacement of an earnings stream. The earnings streams to be replaced were of varying duration over the 1953 through 1984 period. Each of these special-purpose portfolios is referred to as a dedicated portfolio. It turned out that dedicated portfolios consisting of U.S. Treasury securities of one-year constant maturity constituted the least cost means of providing for future earnings streams. The averages of the ex post or realized yields on dedicated portfolios and the ex post rates of growth in wages were approximately the same. The atypical differentials between interest rates and wage growth rates during the 1981 through 1988 period have raised questions regarding the robustness of A-R's and B-L's evidence that the appropriate differential is approximately zero. At first blush, it may seem plausible for litigants, juries and judges to review and compare recent data relating to the differential between interest rates and wages growth rates. We refer to such data as contemporaneous; that is, year-by-year, actual interest rates and actual rates of growth in wages as they move through time. The focus of this article is on a narrow, but timely, issue: namely, does information regarding interest rates and rates of growth in wages just prior to a loss period provide useful information regarding the present value of the future stream of wages during the loss period? The answer to this question is especially important during periods when the contemporaneous differential differs markedly from zero. [1] The Model In this section there is a discussion of the adjustment of the economy to discrepancies between the actual level of interest rates and rates of growth in wages. Within the context of such adjustments, a model is presented of the impact of contemporaneous differentials on the relation between returns on dedicated portfolios and growth rates in wages. Contemporaneous Interest Rates and Wages Growth It is common to define the nominal rate of interest (r) as the sum of the expected real rate (i) and an inflation premium (p).[.sup.2] Similarly, the rate of growth in wages (g) may be defined as the sum of the rate of growth in the marginal productivity of labor (f), and the rate of change in the general price level (p). The differential between i and f depends upon an economic relationship between the real rate of interest and the productivity of labor. That relationship rests, in turn, on a relation between the productivity of real capital and the productivity of labor. Relationships among the real rate of interest, the marginal productivity of labor, and the marginal productivity of real capital emerge from steady-state equilibrium conditions of the economy. The marginal productivity of capital is defined as r = mp[.sub.K]P[.sub.O]/P[.sub.K] (Where mp[.sub.K]P[.sub.O] = capital's marginal revenue product in constant prices, and P[.sub.K] = the price of capital).[3]The productivity of labor is defined as L = mp[.sub.L]P[.sub.O]/(W/i) (where mpLP[.sub.O] = labor's marginal revenue product in constant prices, and W = the nominal wage for labor).4 Using K to denote the capital stock, N for the number employed and T to denote the state of technology along with other factors affecting the productive process (e. …

Cost-Benefit Analysis of Interferon Alfa-2b in Treatment of Hairy Cell Leukemia

The clinical benefits as well as the cost benefits of use of recombinant interferon (IFN) alfa-2b instead of conventional chemotherapy (primarily chlorambucil) for progressive hairy cell leukemia were assessed retrospectively on the basis of 12 months of clinical data from 128 patients treated with IFN alfa-2b. Data from 71 matched historical control patients who had received conventional treatment were used for survival analysis. Hematologic response (reversal of cytopenias) was achieved by 18% of the control patients versus 73% of the IFN-treated patients. This response was associated with virtual elimination of the need for transfusions and splenectomy as well as dramatic decreases in the frequency of fatal infections (22.5% vs. 1.6%) and the 12-month mortality rate (28% vs. 3.1%). Direct costs per patient per year for medical care (transfusions, antibiotic treatment, splenectomy, and chemotherapy) of those receiving IFN alfa-2b were 2.8-fold lower than costs for medical care of control patients ($5,027 vs. $14,046). Indirect costs, which reflect the present value of future earnings lost due to premature death, were 13.3-fold lower for IFN-treated patients than for control patients ($4,771 vs. $63,507). Our analysis demonstrates that IFN alfa-2b offers substantial clinical and cost advantages to patients with hairy cell leukemia and that the introduction of this therapy using novel biotechnology furthers the health care community's commitment to cost containment.

Estimating Present Value of Future Earnings: Experience with Dedicated Portfolios

The determination of pecuniary damages in personal injury and death actions often requires estimates that encompass expected future experience over extended periods of time. An anomoly plays an integral role in the estimation process. Namely, although neither the actual levels of future interest rates nor future wage growth rates can be predicted with reasonable certainty, the present value of magnitudes emerging from them can be. Such certainty emerges by virtue of the predictable covariance between the rates of growth of workers' earnings and interest rates reflecting the time value of money. This paper provides empirical evidence relating to the appropriate differential between interest rates and the rate of growth in wages for estimating the present value of a future earnings stream.