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1. Discounted Decision Tree
Analysis
REPORTER: MARY GRACE D. SALVADOR

2. Understanding Decision Trees
Decision trees provide a structured approach to decision-making by visually mapping out
choices and their potential consequences, making complex decisions more manageable.
 Definition and Structure
A decision tree is a graphical representation used to make decisions.
 How It Works
Decision trees evaluate choices based on probabilities and outcomes.
 Use Cases in Decision Making
Widely used in fields like finance, healthcare, and marketing.

4. Integrating Time Value of Money
 Understanding Time Value of Money
A dollar today is worth more than a dollar in the future due to its potential earning capacity.
 Discounting Future Cash Flows
Calculating expected cash flows and reducing them by a discount rate reflects actual value.
 Combining Decision Trees with Discounting
This integration provides a nuanced analysis of risks versus rewards, maximizing present value.

5. Building a Simple Discounted Decision
Tree
 A discounted decision tree is a vital analytical tool for evaluating complex decisions. The
process begins with setting up the decision tree, calculating expected payoffs, applying
discount rates to future cash flows, and ultimately selecting the path that offers the highest
expected present value. This method provides clear insights for stakeholders, helping them
visualize their decisions and potential outcomes.

6. Initial Setup
dentify choices, outcomes, probabilities, and cash flows.
2. Calculating Expected Payoffs
Multiply cash flows by their associated probabilities.
3. Applying Discount Rates
Calculate present value using an appropriate discount rate.
4. Finalizing the Tree
Select the path with the highest expected present value.

7. Sample Scenario Analysis for Product
Launch
 This analysis focuses on a company's decision-making process regarding a new product
launch. It incorporates probabilities and cash flows for different outcomes, creating a
decision tree for better visualization of risks and rewards. By evaluating expected cash
flows against costs, the company can make informed decisions.

8. Scenario Overview
Illustrating possible outcomes including success, moderate success, and failure.
 Probabilities and Cash Flows
60% success with $500,000 cash flow; 30% moderate success with $200,000; 10% failure with no
cash inflow.
 Decision Tree Analysis
Visual representation of outcomes aiding in expected cash flow calculations.
 Making Informed Decisions
Proceed if expected present value exceeds costs; balancing risk and returns.

9. Conclusion and Next Steps
 Key Takeaways
Decision trees enhance financial decision-making clarity.
 Practical Applications
Useful in diverse business scenarios like investments and project assessments.
 Encouraging Future Use
Integrate decision tree analysis into your strategic planning toolkit.

10. THAT’S ALL
THANK YOU