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Financing and cost accounting

5.3 Decision trees

Decision trees force the decision maker to consider the logical sequence of events.
A complex problem is broken down into smaller, easier-to-handle sections. The
financial outcomes and probabilities are shown separately, and the decision tree is
‘rolled back’ by calculating expected values and making decisions.

A square is used to represent a decision point. The value at this
point will be the highest possible expected value from the options
being considered.

A circle is used to represent a chance point. The value at this point
will be the expected value (based on the probabilities) of the
outcomes possible from this point forward.

Illustrations and further practice

Now try TYU questions 10 and 11.

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