What Do the Courts Want? Finding the methodology for determining the appropriate discount rate in a lost profits case can be a convoluted journey. The numerator (the lost profits) may be adjusted through modeling. The denominator (the discount rate) may be a risk-free rate, a rate of return on investments, or the rate of return commensurate with generating the lost profits had no wrongful act occurred. And, whether modeling is used to adjust the lost profits will impact the risk premia that affects the discount rate. Experts must review the facts of each assignment and apply an approach which they…
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For Calculating Future Lost Profits Robert Dunn and Everett Harry published their oft cited Modeling and Discounting Future Damages in 2002. The article laid out the process for assessing future lost profits and discounting them to present value. They argued modeling future losses reduced the uncertainty related to the loss calculation and therefore reduced the risk premium to be included in the discount rate. They also argued modeling future losses and using a risk-reduced, relatively low discount rate was easier for judges and juries to understand. While their discussion on a risk-adjusted discount rate has been somewhat controversial, the need…