Decision trees: Practice Questions

• a.They are only applicable to manufacturing businesses and not service sectors.
• b.The data used for probabilities and expected values is often based on estimates rather than certainties.
• c.They ignore the potential financial costs of different options.
• d.They cannot be used to compare two different investment projects.

• a.Combining two different chance nodes into a single decision node.
• b.Removing the probabilities that sum to less than 1.0.
• c.Rejecting the options with the lower expected monetary values at a decision node.
• d.Ignoring the initial costs of the project to focus on revenue.

• a.The probability of failure cannot be higher than the probability of success.
• b.The probabilities at a chance node must sum to exactly 1.0.
• c.The analyst forgot to subtract the initial cost from the probabilities.
• d.Probabilities must be expressed as percentages, not decimals.

• a.A chance node showing the probability of different market outcomes.
• b.A decision point where the management must choose between different courses of action.
• c.The point where net profit is calculated after deducting initial costs.
• d.The final expected monetary value (EMV) of a specific project.

• a.They should be ignored as they cannot be assigned a probability.
• b.They should be converted into a decimal and added to the probability of success.
• c.They should be considered alongside the numerical EMV, as the tree only accounts for quantifiable data.
• d.Qualitative factors are already inherently included in the calculation of the final payoff values.

Write your answer out first, then check it against the worked solution.

Write your answer out first, then check it against the worked solution.

Write your answer out first, then check it against the worked solution.