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476 Corporate Finance BRILLIANT’S

The decision tree approach can take care {S>grOZ Q´>r EàmoM Bg àH$ma Ho$ _ëQ>r ñQ>oO {S>grOZ
of this type of multi stage decisions. The H$mo Ü`mZ _| aIVm h¡Ÿ& Bg AàmoM H$m Zm_ {S>grOZ Q´>r
decision- tree approach gets its name because AàmoM Bg{bE n‹S>m Š`m|{H$ Bg_| Q´>r Ho$ g_mZ {d{^ÝZ
it is similar to a tree having number of emImE± hmoVr h¢Ÿ& {S>grOZ Q´>r EH$ S>m`J«m_ h¡ Omo {d{^ÝZ
branches. The decision-tree is a diagram that
{S>grOZ AëQ>aZo{Q>ìg, CZHo$ AmCQ>H$åg VWm CZH$s
permits the various decision alternatives, their
outcomes and probabilities of their occurrences àmo~o{~{bQ>r H$mo gm_Zo aIVm h¡Ÿ&
clearly.

Steps in Decision-Tree Approach {S>[gOZ Q´>r AàmoM Ho$ ñQ>oßg
A Decision-Tree is a graphic display of the {S>grOZ Q´>r EH$ J«m{\$H$ {S>ñßbo h¡ Omo àoOoÝQ>
relationship between a present decision and {S>grOZ Ed§ â`yMa BdoÝQ> Ed§ â`yMa {S>grOZ VWm CgHo$
future events, future decisions and their con- n[aUm_m| Ho$ ~rM gå~ÝYm| H$mo àH$Q> H$aVm h¡Ÿ& {H$gr
sequences. While constructing a decision-tree
for a given problem, following steps should be àm°ãb_ H$m {S>grOZ Q´>r ~ZmVo g_` {ZåZ{b{IV ñQ>oßg
considered: H$mo Ü`mZ _| aIm OmVm h¡…
1. Break the project into clearly defined 1. àmoOoŠQ> H$mo {d{^ÝZ ñQ>oOog _| ñnîQ> ê$n go ~«oH$
stages. In some cases, it is easy to do so. H$aZmŸ& Hw$N> Ho$gog _| `h AmgmZ hmoVm h¡Ÿ& H¡${nQ>b
The capital budgeting decisions may also ~OqQ>J gå~ÝYr {ZU©`m| _| ^r Bgo {d{^ÝZ ñQ>oO _|
be broken up in different stages. ~«oH$ {H$`m OmVm h¡Ÿ&
2. List all possible outcomes at each stage 2. àË`oH$ ñQ>oO Ho$ g§^m{dV n[aUm_m| H$mo CnbãY gyMZm
along with its probability on the basis of Ho$ AmYma na CZH$s àmo~o{~{bQ>r g{hV Xem©ZmŸ& `h
available information. This task becomes
more difficult when more and more stages H$m`© Cg g_` O{Q>b hmo OmVm h¡ O~ ñQ>oOog H$s
are introduced. g§»`m A{YH$ hmoŸ&
3. Specify the effect of each outcome on the 3. àmoOoŠQ> Ho$ àË`oH$ AmCQ>H$_ H$m g§^m{dV H¡$e âbmo
expected cash flows from the project. na à^md OmZZmŸ&
4. Evaluate the optimal action to be taken at 4. {nN>br ñQ>oO Ho$ n[aUm_m| Ho$ AmYma na {S>grOZ Q´>r
each stage in the decision-tree, based on H$s àË`oH$ ñQ>on na H$m¡Z-gr EŠeZ R>rH$ hmoJr,
the outcome of the previous stage.
BgH$m {ZYm©aU H$aZmŸ&
Advantages of Decision Tree Approach {S>[gOZ Q´>r EàmoM Ho$ bm^

1. Decision-tree approach is a very 1. {S>grOZ Q´>r EàmoM {H$gr àmoOoŠQ> go g§§~§{YV
important tool to deal with uncertainty A{ZpíMVVm H$m {díbofU H$aZo H$s EH$ _hËdnyU©
in project.
nÕ{V h¡Ÿ&
2. It considers the project in stages and the 2. `h àmoOoŠQ> H$mo {d{^ÝZ ñQ>oO _| {d^m{OV H$aVm h¡
decision at any stage depends upon the VWm àË`oH$ ñQ>on H$m {S>grOZ, {nN>bo ñQ>on Ho$ {S>grOZ
outcomes of the previous stage.
na {Z^©a H$aVm h¡Ÿ&
3. It provides us with different alternatives 3. `h EàmoM h_| {H$gr àmoOoŠQ> H$mo ewê$ H$aZo Ho$ {d{^ÝZ
to start a project. VarHo$ ~VmVr h¡Ÿ&