In a decision tree,caution should be used in the analysis because:
A) early stage decisions are probably riskier and should not likely use the same discount rate.
B) if a negative NPV is actually occurring, management should opt out of the project and minimize the firm's loss.
C) decision trees are only used for financial planning.
D) Both early stage decisions are probably riskier and should not likely use the same discount rate; and decision trees are only used for financial planning.
E) Both early stage decisions are probably riskier and should not likely use the same discount rate; and if a negative NPV is actually occurring, management should opt out of the project and minimize the firm's loss.

Question

Quizplus · Accepted Answer

Caution should be used in the analysis of decision trees because early stage decisions are probably riskier and should not likely use the same discount rate, and if a negative net present value (NPV) is actually occurring, management should opt out of the project and minimize the firm's loss. Decision trees are not limited to financial planning but can also be used in other areas such as risk management and operational decision-making. Thus, option E is the best choice as it covers both important cautions in the analysis of decision trees.

In a Decision Tree,caution Should Be Used in the Analysis