CMA Study Group

  • 1.  Decision Tree

    Posted 06-16-2021 01:53 PM
    I was practicing essays and wrote about Risk in Capital Budgeting. I wrote decision tree as a risk evaluation method. While i think that it will take more time to type it, it is easily understandable than others. So, if you can review it and tell me that what I wrote makes sense to you.

    1. Decision Tree: The decision tree is a tool that breaks a giant issue into smaller problems. The management break a bigger problem into many smaller ones using decision nodes and probability nodes. The decision nodes are the areas where the management take decisions using intelligent guesses and past experiences, and the probability nodes are those which are macro factors and outside the control of the management. For example, whether to open a smaller shop or a large shop in a neighborhood depends upon the management's decision and research and is defined as a decision node, while entering into a new country and being successful there depends upon many macro factors which are outside the control of the management are the probability nodes. The management makes a larger picture comprising of many smaller problems, and they work backwards solving each problem using the various nodes till they arrive at an expected value for each smaller problem. At the end after solving each smaller problem, one expected value is calculated which incorporates all decisions and probability is arrived and is used in the capital budgeting decisions.

    Nupur Mahajan
    Hartford CT United States