Decision trees:
A) are an alternative to NPV analysis.
B) recognize that managers may need to react to unexpected future events.
C) are a way to adjust the discount rate to allow for uncertainty.
D) lay out the different steps in preparing the capital budget.

Question

Quizplus · Accepted Answer

Decision trees are a visual representation of decision-making that take into account different possible outcomes and the probability of those outcomes occurring. This allows managers to see the potential consequences of their decisions and make adjustments accordingly. Decision trees are useful for analyzing complex situations where uncertainty is a factor and help managers react to unexpected future events. They are not an alternative to NPV analysis, a way to adjust the discount rate, or a way to lay out the different steps in preparing the capital budget.

Decision Trees