What is the utility of Decision Tree Analysis?

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The decision tree analysis process is an extremely useful tool to calculate sequential investments. As we determine the branches of the decision tree, we can work backward, from future to present to cancel the unprofitable alternatives. By doing so, we can keep only the profitable investment options in our hands.

Therefore, the decision tree analysis offers a unique approach to get a bigger picture of the original alternatives and thereby lets the investors choose an optimum profitability project.

The utility of decision tree analysis can be broadly divided into the following categories −

Presents a Clear Picture

The decision tree analysis shows all implicit assumptions and calculations for all to check the profitability and question or analyze the options of profitability of a sequential investment project. It not only makes the options and alternatives clear but also shows the better alternatives of an investment project.

Having a clear picture of the overall investment project helps the investors choose the best options and arrive at a clear alternative after examination and analysis of all options at hand. It is therefore a very handy tool that is clear and simple for analyzing investment projects.

Graphic Visualization

As the decision tree method offers a clear picture of all alternatives at hand regarding the investments, it is a very simple tool for the analysis of various investment options. As the options regarding sequential investment are shown by a graphic visualization method, it makes the investment options very clear and succinct.

Graphic visualization also lets all the stakeholders check the options in a simple format that everyone can understand easily, thereby making the process open for all to check and verify if anything is missed or left without consideration.

Representation in an 'ifthen' Approach

Sequential investments and the decision trees are made in an "ifthen" method. That is, if one assumption is taken, the decision tree shows what will be the alternatives then. It is a very handy approach to analyze different investment options.

As options are categorized in a simple yet effective manner, the business owners can see the alternatives to choose the best option from a host of alternatives. It is therefore a very useful way to handle sequential investments.

Limited Limitations

Apart from the chance of having too many alternatives for one option in the decision tree, the limitations in the decision tree method are limited. As the sequential investments offer the decision tree approach a selective approach, investors can limit the options, thereby limiting the exaggerations of the investment process. This makes the decision trees a very handy tool to represent investments with limited limitations.

Published on 24-Dec-2021 11:13:25