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 A and C.
E)Both A and B.

Question

Quizplus · Accepted Answer

In a decision tree, early stage decisions are often riskier and may require a different discount rate than later stage decisions. Additionally, if the analysis shows a negative net present value (NPV), it is often best for management to opt out of the project to minimize losses. Decision trees are not only used for financial planning, but also for strategic decision-making in various industries. Therefore, both options A and B are true and should be considered to ensure a thorough analysis.

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