Base Case
Executive Summary
Key Takeaways
- ✓ The base case is the primary scenario in a financial model, constructed using the model developer's central estimates for each assumption.
- ✓ A base case assumption is the central estimate for a given variable: the price most likely to be achieved, the cost most likely to be incurred, the timeline most likely to be met.
- ✓ A financial model typically contains multiple scenarios:
- ✓ When auditing a model's base case, the auditor examines: whether assumptions are reasonable in the context of available market data; whether the base case is internally consistent (assumptions do not contradict each other); and whether the stated base case is genuinely central rather than optimistic (which would understate risk for the decision-maker).
Definition¶
The base case is the primary scenario in a financial model, constructed using the model developer's central estimates for each assumption. It represents the most probable outcome, given the information available at the time the model is built. It is the reference scenario from which all other scenarios diverge.
The base case is not the best-case outcome (which uses optimistic assumptions) and is not the downside case (which uses pessimistic assumptions). It is the developer's best current projection of how the modelled entity or project is likely to perform.
Role in Financial Modelling¶
Decision basis. Investment decisions, credit approvals, and transaction pricing are typically made on the basis of the base case. An investment committee that approves a transaction at a stated IRR is approving it on the base case IRR.
Reference point for sensitivity. Sensitivity analysis shows how the base case outputs change when individual assumptions are varied. The base case represents the centre of the sensitivity matrix.
Comparison point for scenarios. Upside and downside scenarios are defined as deviations from the base case. The base case is the anchor.
Covenant testing baseline. In project finance, the base case DSCR is the reference for lender covenant testing. Lenders assess whether the project can service debt under the base case before assessing its performance under stress.
What Constitutes a Base Case Assumption¶
A base case assumption is the central estimate for a given variable: the price most likely to be achieved, the cost most likely to be incurred, the timeline most likely to be met. It is not a conservative estimate (which would typically be used for the downside case).
In practice, what is termed a "base case" varies between contexts. In some investment committee processes, the "base case" presented is in fact a conservatively constructed scenario to ensure the investment is approved only when it meets the return threshold even on conservative assumptions. In such cases, the model should distinguish clearly between the developer's central projection and the committee's conservative base.
Relationship to Model Scenarios¶
A financial model typically contains multiple scenarios:
| Scenario | Assumption Approach | Relative to Base |
|---|---|---|
| Upside | Optimistic assumptions | Returns above base |
| Base Case | Central estimates | Reference |
| Downside | Pessimistic assumptions | Returns below base |
| Stress / Lender's Case | Conservative, defined by lender | May differ from developer's downside |
Audit Considerations¶
When auditing a model's base case, the auditor examines: whether assumptions are reasonable in the context of available market data; whether the base case is internally consistent (assumptions do not contradict each other); and whether the stated base case is genuinely central rather than optimistic (which would understate risk for the decision-maker).
Continue Reading¶
Prerequisites¶
- Excel Financial Models — the parent pillar
Related Technical Guides¶
- Sensitivity Table Integrity — the check that verifies sensitivity analysis correctly reflects base case changes
Related Glossary¶
- Downside Case — the pessimistic scenario defined relative to the base case
- IRR — the primary return metric reported for the base case in equity investments
- NPV — the value metric reported for the base case
Related Products¶
- Financial Model Audit Engine (FMAE) — deterministic structural auditing referenced throughout this guide
How OXXON tests thisRun a free structural check with FMAE
Related Articles
Downside Case
The downside case in a financial model is a scenario constructed using pessimistic but plausible assumptions to assess the model's projected performance under adverse conditions. It is defined relative to the base case: each assumption in the downside case is set at a level less favourable than the base case, representing conditions that could realistically occur but that the developer does not expect to be the most likely outcome. The downside case is used by lenders and investors to assess whether a project or investment can withstand a realistic adverse scenario while continuing to service debt and meet minimum covenant requirements.
Sensitivity Table Integrity in Financial Models
Sensitivity table integrity refers to whether the results displayed in an Excel data table in a financial model reflect the current state of the model's calculations or whether they represent stale values from a previous calculation state. An Excel data table runs a series of calculations by substituting different input values into designated cells and recording the outputs. If automatic calculation is disabled, if the data table's input cells are incorrectly specified, or if the data table has been converted from dynamic to static values, the sensitivity results displayed may not correspond to the model as it currently stands. This is a high-risk structural failure because it provides false assurance about the model's sensitivity to changes in key assumptions.