Pel (1997) discusses another method by which present values can be calculated: the case-by-case method. With this method, one uses earnings growth appropriate for the particular case. A valid example may be one for which long-term union contracts are available. Pel (1997) also advocates the use of Treasury Strips to yield the relevant net discount rates for discounting. When historical averages are avoided, this method is entirely consistent with the basic method using forecasted data since market interest rates reflect a current consensus forecast of future rates.
Out of all the alternatives, discounting still comes down to just applying the relevant net discount rate. It is clear that total offset is unfounded and that historical average net discount rate is arbitrary and unreliable. The Gilbert contribution is hopelessly flawed mathematically. The below-market rate is unfounded if it promotes or justifies arbitrary net discount rates. In some cases, one is supplied with or can reasonably estimate the earnings growth so the case-by-case method is appropriate. Pel’s average GDR method provides a good estimate of actual loss with perfect foresight. With perfect foresight, however, why use an approximation? His average GDR method falls prey to the same historical averaging problems as with the historical average net discount rate: there is no stable long-run mean, and selection of a historical period is arbitrary and unreliable. One is left, then, with the conclusion that professional forecasts of interest rate, earnings growth rate and inflation provide the best, least arbitrary method of estimating future loss.
(Grout, 2002)
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