Example 5.

2 - Decision trees
Value Revenue Move Cost
Strong Growth $765,000 $975,000 $210,000
0.55
Move
$585,000

Weak Growth $365,000 $575,000 $210,000

0.45

Hacker's Computer Strong Growth $863,000 $950,000 $87,000

Store 0.55
Expand
$703,750 $660,500

Weak Growth $413,000 $500,000 $87,000

0.45

Expand $843,000 $930,000 $87,000

Strong Growth
$850,000
0.55
Do Nothing Do Nothing $850,000 $850,000 $0
$703,750

Weak Growth $525,000 $525,000 $0

0.45
Exhibit 5.4 - Decision Tree Analysis

EV= $ 585,000.00 $ 765,000.00 Strong Growth

0.55

$ 365,000.00 Weak Growth

Move 0.45

EV= $ 660,500.00 $ 863,000.00 Strong Growth

Expand 0.55

$ 413,000.00 Weak Growth

0.45

EV= $ 850,000.00
Do Nothing Strong Growth 0.55

EV= $ 703,750.00

Weak Growth $ 525,000.00

0.45

Alternative Revenue
Move to new location, strong growth $975,000.00
Move to new location, weak growth $575,000.00
Expand Store, strong growth $950,000.00
Expand Store, weak growth $500,000.00
Do nothing now, strong growth, expand next year $930,000.00
Do nothing now, strong growth, do not expand next year $850,000.00
Do nothing now, weak growth $525,000.00

When determining the optimal strategy for a decision tree, start at the right and work toward the left o
a time. If the node is a decision (square) node, chose the decision alternative with the best value and
the other alternatives. The payoff for the best decision alternative is used as you continue to the left.
is an uncertainty (circular) node, calculate the expected value for that node and use it in further calcul
 Expand
$ 843,000.00

Do Nothing $ 850,000.00

Cost Value
$210,000.00 $765,000.00
$210,000.00 $365,000.00
$87,000.00 $863,000.00
$87,000.00 $413,000.00
$87,000.00 $843,000.00
$0.00 $850,000.00
$0.00 $525,000.00

ht and work toward the left one node at

ative with the best value and cross off
d as you continue to the left. If the node
de and use it in further calculation.
Exhibit 5.5 - Decision Tree Analysis using NPV

EV= $ 310,612.69 $428,487.26 Strong Growth

0.55

$166,543.77 Weak Growth

Move 0.45

EV= $ 402,506.90 $535,115.79 Strong Growth

Expand 0.55

$240,429.37 Weak Growth

0.45

EV= $556,629.92
Do Nothing Strong Growth 0.55

EV= $ 460,856.83

Weak Growth $343,800.83

0.45

Alternative Revenue
Move to new location, strong growth $638,487.26
Move to new location, weak growth $376,543.77
Expand Store, strong growth $622,115.79
Expand Store, weak growth $327,429.37
Do nothing now, strong growth, expand next year $604,874.41
Do nothing now, strong growth, do not expand next year $556,629.92
Do nothing now, weak growth $343,800.83

When determining the optimal strategy for a decision tree, start at the right and work toward the left o
time. If the node is a decision (square) node, chose the decision alternative with the best value and c
other alternatives. The payoff for the best decision alternative is used as you continue to the left. If th
uncertainty (circular) node, calculate the expected value for that node and use it in further calculation.
 Expand
$529,874.41

Do Nothing $556,629.92

Cost Value
$210,000.00 $428,487.26
$210,000.00 $166,543.77
$87,000.00 $535,115.79
$87,000.00 $240,429.37
$75,000.00 $529,874.41
$0.00 $556,629.92
$0.00 $343,800.83

ht and work toward the left one node at a

ve with the best value and cross off the
you continue to the left. If the node is an
d use it in further calculation.