3.3.3 Decision Trees

Question 1

decision trees

Answer 1

mathematical models techniques
set out all options available for managers when making a decision, plus possible outcomes of those decisions

suited to problems where sequence of events has to be followed

most useful in tactical/routine decisions

numbers always under the line

remember to subtract initial cost of investment from EV

Question 2

structure of decision trees

Answer 2

square _ lines _ circle _ outcomes _ result

Question 3

probability

Answer 3

chance of an outcome happening

Question 4

expected value

Answer 4

financial value of outcome calculated by multiplying estimated financial effect by its probability

outcome x probability

P x result

Question 5

net gain (expected monetary reward)

Answer 5

value to be gained from taking a decision
calculated by adding together expected value of each outcome and deducting the costs associated with the decision

expected value - costs

Question 6

adv of decision trees

Answer 6

1. allows for uncertainty/chance
2. consider all possible outcomes
3. set out problems clear/ encourage logical approach= clear decision pathway (chose 1 with highest net gain)
4. encourage quantitative approach & force assessments of chance/implication of success/failure
5. shows av value of decision & probability
6. similar scenarios = good estimate = actual value exist
7. assess risk involved in decision only investment appraisal technique
8. MR/past sales data/extrapolation - used to calculate probability/results = expected values

Question 7

decision tree definition

Answer 7

mathematical models techniques

set out all options available for managers when making a decision, plus possible outcomes of those decisions

Question 8

limitations of decision trees

Answer 8

1. biased/optimism = exaggerated figures = prove pre desired results = favour probabilities
2. difficult to get meaningful data
3. less useful in new problems (1 off issues)
4. divert managers from need to account for qualitative too
5. results/probabilities/costs = estimates/subject to error
6. external factors especially with long lead time
7. expected value won’t actually happen actual = higher or lower
8. qualitative research should be used too

Question 9

lead time

Answer 9

Lead time is the amount of time that passes from the start of a process until its conclusion

Question 10

square

Answer 10

decision to be made