Critical Assumption Identification
During this step the assumptions are identified and there is a determination of criticality. The hardest part of CAP is to identify the assumptions that are not written down.
In order to determine the criticality of the assumptions, they need to be quantified; it is then possible to put the financial results in a spreadsheet and link them together. These financial impacts will change for the various assumptions.
CAP measures the criticality of an assumption as a change in the net present value of a venture (NPV). To determine criticality each assumption is assigned a range of uncertainty: base case, best and worst case. Then, assumption for assumption, while keeping the other assumptions at base case, the NPV changes for each assumption in the worst and best case scenarios are checked.
The NPV analysis proves the company with information about the criticality of an assumption. Two signals strongly indicate a critical assumption: a big difference in NPV between the best and worst-case scenarios, or a huge loss of NPV in the worst-case scenario
Read more about this topic: Critical Assumption Planning
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