Presented By : -

Ahsan
Hussain ID : 4583
Decision Trees
Planning Tool
Decision Trees
Enable a business to quantify decision
making
Useful when the outcomes are
uncertain
Places a numerical value on likely or
potential outcomes
Allows comparison of different possible
decisions to be made
 Decision Trees
Limitations:
How accurate is the data used
in the construction of the tree?
How reliable are the estimates
of the probabilities?
Data may be historical – does this data relate to
real time?
Necessity of factoring in the qualitative factors
– human resources, motivation, reaction,
relations with suppliers and other stakeholders
Process
 Economic growth rises Expected outcome
0.7 £300,000

Expand by opening new outlet

Economic growth declines Expected outcome
-£500,000
0.3

Maintain current status

£0

The circle denotes the point where different outcomes could occur. The estimates of the probability and
the knowledge of the expected outcome allow the firm to make a calculation of the likely return. In this
A square
example it is: denotes the point where a decision is made, In this example, a business is contemplating
There is also
opening the outlet.
a new option The
to douncertainty
nothing andis maintain
the state the current
of the status– quo!
economy if theThis wouldcontinues
economy have an outcome
to grow of
£0.
Economic growth
healthily rises: is
the option 0.7estimated
x £300,000 = £210,000
to yield profits of £300,000. However, if the economy fails to grow as
expected, the potential loss is estimated at £500,000.
Economic growth declines: 0.3 x £500,000 = -£150,000
The calculation would suggest it is wise to go ahead with the decision ( a net ‘benefit’ figure of +£60,000)
 The Process
Economic growth rises Expected outcome
0.5 £300,000

Expand by opening new outlet

Economic growth declines Expected outcome
-£500,000
0.5

Maintain current status

£0

Look what happens however if the probabilities change. If the firm is unsure of the potential for growth, it
might estimate it at 50:50. In this case the outcomes will be:
Economic growth rises: 0.5 x £300,000 = £150,000
Economic growth declines: 0.5 x -£500,000 = -£250,000
In this instance, the net benefit is -£100,000 – the decision looks less favourable!
Advantages
Disadvantages
If you really want something, you
“ QUOTES “
can figure out how to make it
happen.
Cher
You are here for a purpose. There
is no duplicate of you
in the whole wide world. There
never has been, there never
will be. You were brought here now
to fill a certain need.
Take time to think that over.“ !!!!!
