Tools › Finance and Business › Economics and Damages › Lost Profits and Business Interruption › Example

Six-month interruption of an illustrative retail business: growth-trend but-for revenue with seasonal indices, cost regression, prejudgment interest, ex post and ex ante values, the business-income forms and the coinsurance penalty

Tool	Lost Profits and Business Interruption
Source	Allen, M. A., Hall, R. E., and Lazear, V. A. (2011). "Reference Guide on Estimation of Economic Damages." In Federal Judicial Center and National Research Council, Reference Manual on Scientific Evidence, 3rd ed. The National Academies Press, Washington, DC, pp. 425–502 (Sections VI.B, VI.G, VI.I, VII.C; Tables 1–3 and 6–7); United States Court of Appeals for the Fifth Circuit (1974). Lehrman v. Gulf Oil Corp., 500 F.2d 659 (the before-and-after and yardstick methods); United States Court of Appeals for the Federal Circuit (2002). Energy Capital Corp. v. United States, 302 F.3d 1314 (discounting to the date of judgment).
Level	Professional

Problem

A retail business with a 36-month monthly history of revenue and total cost (January 2021 to December 2023, revenue 3,880,297 in total, a December peak every year) is shut from 1 January 2024 to 30 June 2024: closed for three months, then 41,000, 52,000 and 58,000 of revenue in April to June. Project the but-for revenue of the six months by a growth trend fitted to the history with ratio-to-trend seasonal indices, find the lost revenue, the costs avoided from a regression of cost on revenue, the lost profits, their value at the 1 January 2025 valuation date with 5 % simple prejudgment interest (ex post) and the ex ante alternative at 6 %; then the business income loss of the same six months in the gross-earnings and net-income forms with 55 % cost of sales, 25,000 continuing and 5,000 discontinued expenses a month, 10,000 ordinary payroll a month limited to 90 days, 15,000 extra expense, a 400,000 limit at 80 % coinsurance and a 2,500 deductible; and the capitalised value of the annual stream at 20 % less 2 % growth and a 5 % royalty on a 1,200,000 base.

Inputs to Enter

Loss 2024-01-01 to 2024-06-30, valuation 2025-01-01; history 36 lines (YYYY-MM, revenue, cost); actual revenue 0 / 0 / 0 / 41,000 / 52,000 / 58,000; method growth trend with seasonal indices; variable costs by regression
Discount rate 6 %, prejudgment interest 5 % simple; no extra costs or mitigation credits
Restoration 6 months, cost of sales 55 %, continuing expenses 25,000/month, discontinued 5,000/month, ordinary payroll 10,000/month for 90 days, extra expense 15,000, limit 400,000, coinsurance 80 %, 12-month value blank (from the history), deductible 2,500
Capitalisation rate 20 %, growth 2 %, perpetuity; royalty base 1,200,000 at 5 %

Open the Lost Profits and Business Interruption tool (loaded with this example)

Answers

Growth trend ln R = 11.4416 + 0.0076392 t: 0.7668 % a month, 9.600 % a year (R² 0.253 on the raw seasonal history); seasonal indices 0.839 (Jan) to 1.351 (Dec), three observations each
But-for revenue 102,892 / 96,661 / 115,697 / 125,866 / 126,403 / 132,274 = 699,793.50; actual 151,000; lost revenue 548,793.50
Cost regression: cost = 41,924.06 + 0.5354 × revenue (R² 0.975); costs avoided 293,812.72; lost profits 254,980.78
Ex post value at 1 January 2025: 254,980.78 + 9,831.44 interest = 264,812.22; ex ante value (discounted to the loss date, 251,581.25, carried forward × 1.0501) 264,186.14; annualised stream 509,961.56
Business income: lost gross profit 246,957.08, discontinued expenses 30,000, payroll beyond 90 of 182 days 30,329.67, loss 186,627.41 by both forms; required insurance 0.8 × 606,430.35 = 485,144.28, ratio 0.8245, payment 153,873.74 + 15,000 extra expense − 2,500 = loss payable 166,373.73, uninsured 35,253.67
Capitalised value 509,961.56 / (0.20 − 0.02) = 2,833,119.78; royalty 1,200,000 × 5 % = 60,000.00

Notes

The tool's default inputs are this case; press Submit. The history, benchmark index, actual revenue and insurance figures are illustrative (stated on the page); every value is a closed form checked by test_lost_profits.php (761 checks) against an independent numpy implementation (References/Lost-Profits/checks/), and the interest, discounting and capitalisation arithmetic is checked on the Reference Guide's Tables 1, 2, 3, 6 and 7 and its capitalization example.