IRR or NPV question

Need to calculate the expected returns or loss and IRR for a pending legal action. Trying to determine how to calculate risks and returns based on go-no-go decisions at certain points and the overall returns if different outcomes happen, i.e. settle for $XX, win $$, lose and just have $XX expenses, etc Any help on formulae, examples or spreadsheets would be welcome.

Answers

J.G. Collins Managing Director • November 18, 2013

IRR for litigation is extremely difficult because of the uncertainty of the time element and outcome of delays, appeals, etc.

For that reason, its important not to oversell a high IRR to your management even for litigation that is likely to be successful. The best you can do is provide an array of IRR's based on estimated awards, taking account of the likelihood AND timing of various appeals, continuances, and delays after you get some "guesstimates" from your trial attorneys.

You can lay out the various scenarios and the time scales. But recognize that these are at best long-shot estimates (you settle the case tomorrow vs. in the extreme the case goes to the SCOTUS that sends the case back to the trial court on a procedural matter that starts the clock all over again.)

Depending on your circumstances, you can ramp up to some fairly sophisticated analysis involving statistical analysis and game theory, but I'm guessing you're not looking for that level for this purpose.

Jerry Goldberg Principal • November 18, 2013

Thanks. That was my intent to basically lay out individual IRR's per possible event but wanted to see if anyone had an example previously used. Appreciate the note.

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