Summarize the steps in the decision tree analysis methodology
What will be an ideal response?
Answer: The decision tree analysis methodology is summarized as follows:
1. Identify the duration of each period (month, quarter, etc.) and the number of periods T over which the decision is to be evaluated.
2. Identify factors such as demand, price, and exchange rate, whose fluctuation will be considered over the next T periods.
3. Identify representations of uncertainty for each factor; that is, determine what distribution to use to model the uncertainty.
4. Identify the periodic discount rate k for each period.
5. Represent the decision tree with defined states in each period, as well as the transition probabilities between states in successive periods.
6. Starting at period T, work back to Period 0, identifying the optimal decision and the expected cash flows at each step. Expected cash flows at each step in a given period should be discounted back when included in the previous period.
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Fill in the blank(s) with the appropriate word(s).
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