The authors provide an example that illustrates the calculation of the present discounted value for the lost wages from a deceased worker, and one component in this calculation is the worker's annual mortality rate (m). Suppose we conduct this computation in two different ways --- one calculation assumes m is constant for all future periods, and the other calculation allows m to decline over time due to improvements in medical technology. Which estimated PDV will be larger?

Question

Quizplus · Accepted Answer

If m is allowed to decline over time, then the mortality risk associated with lost wages will be lower in future periods. This means that the discounted value of those lost wages will be lower as well, resulting in a smaller PDV. Therefore, the PDV with a variable m will be smaller than the PDV with a constant m.

The Authors Provide an Example That Illustrates the Calculation of the Present