Decision Tree

Decision Tree of Marsh Meadow Site

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 Decision Tree

1. An Overview of Decision Tree

Decision Tree is a set of conditions (premises) and actions (conclusions), which is

described as the nodes and branches of a tree that link the premises to conclusions, which can

be understood as a logical tree. It is a tool for decision support, which represents the decisions

and the consequences of these decisions in a tree like structure. The' AND' and' OR' operators

are used to recreate the if-then rules framework. (S.R. and D., 1991)

A decision tree helps to make the ideal choice for complex processes, in particular

when problems of the decision are interrelated and are chronological in nature.

A decision tree does not represent a choice but helps to make it in the form of a tree,

representing graphically of the material data relating to the particular issue. Diagramed as

nodes, branches and sub-branches of a horizontal trees, this chart depicts various courses of

action, probable results, natural conditions, etc.

1.1. Nodes

There are two kinds of nodes:

The Decision Node: the square where distinct action paths occur in the principal branches

from the Decision Node.

The Chance Node: The chance node is symbolized as a circle, where it emerges as sub-

branches, at the terminal stage of the decision node. This illustrates the probabilities and

results.

Think of a scenario where a company presents a fresh new product, for example. A

clear idea of managerial problems can be found in the following decision tree.
 Decision Tree

Figure-1: Types of Nodes in a Decision Tree

 Key A is the node for the choice, namely testing or dropping the product.

 Key B is the result node that shows all possible results. There are only two results,

i.e., favourable or not, depending on the scenario.

 Key C is another decision node that defines a favorable market test and the company

management will decide whether to continue with full advertising or to drop the

product.

 Key D is yet another decision, but it does not show a choice that demonstrates that the

decision is to drop the product if the market test is unfavorable.

 Key E is a node of result again.

The decision tree can be applied in different areas in which decisions are pending, such as

decision making or purchase, investment decision, marketing strategy, and new project

introduction. The decision-maker is to take the option which improves the expected gain or

decreases the total expected costs at each stage of decision. (M.A. and C.E., 1997)
 Decision Tree

2. Scenario: 25 Hectare Site of Marsh Meadow

When a business builds a large plant, the size of the market demand must be as large

as possible. If the company builds a small plant, management will be able to extend the

facility within two years if the demand is high during its first period. While the company will

maintain its small plant operations and profit smoothly on a low volume if demand is low

during the preliminary term. (G.Z., S.E. and H.C., 2006)

In light of the above context, we are going to further evaluate the decision making of

the owner of Marsh Meadow site, Tom Byrne for accepting anyone of the offers made by

interested parties: Wotton Estates and Rochford.

Marsh Meadow is a 24-hectare location in a semi-rural zone that is part of an

increasing European town’s commuter belt. The site is residential, but its owner, Tom Byrne,

has little capital to develop the site himself (i.e. build on it); he planned to sell it instead.

Wotton Estates and Rochford are the two interested parties. Here are the two parties’ offers:

2.1. Wotton Estates

Wotton Estates has provided Tom a price that involves a lump sum plus a

supplementary follow-up payment per hectare to be developed. It offers a lump sum of €3.52

million and a approved development amount of €1.056 million per hectare.

2.2. Rochford Estates

During talks with Rochford’s CEO Pat Leahy, Tom learnt that Rochford wants to give

an offer to buy Marsh Meadow as it is adjacent to Teaburn, another site owned by the firm

and this will allow them to expand and enhance their construction plans of housing

development. The negotiation concluded with Rochford's offer to pay €2.72 million in cash
 Decision Tree

for the Marsh Meadow site, with an authorised development of €2.08 million per hectare if

Teaburn is permitted to be built or €0.512 million per hectare if Teaburn is not permitted.

2.3. “Rollback” Concept

The scenario outlined below shows how the rollback operates. Tom does not have to

choose MS2 when accepting offer of MS1 (see Figure-2) and does not even know if it will

have the opportunity to do so. However, Tom would expand the site development plan, in

light of his present understanding if he had the opportunity of accepting the offer of MS2.

Figure-2 shows the study. The complete value for site development is €3.136 higher than that

for non-expansion. Therefore, the alternative management would choose to deal with the

current data of MS2 (and only think of financial profit as a standard of decision).

3. Decision Tree for Marsh Meadow Site

Tom is considering whether he should accept the two offers (MS1 and MS2). Tom has

three options:

 Accept offer from MS1 only; or

 Accept offer from MS2 only; or

 Accept offer from both MS1 and MS2.

Tom will incur additional costs when financial details of the site development is to be

submitted. These costs must be fully recouped from the price of the offer. Naturally the risk is

that Tom will have lost if an offer is unsuccessful.

Only €3.52 million will be an offer by MS1. The development amount for the site would

be €1.056 million per hectare if the offer will be successful.

Only €2.72 million in cash will be an offer by MS2. The development for the site would

be €2.08 million per hectare if the offer succeeded.

The offer MS1 and offer of MS2 are subject to total cost of €5.25. The supply price for

the development would be €3.136 if the offer is successful.

Possible construction prices have been established for each offer. Furthermore, the

probability of offer being awarded with a specific development price was assessed

subjectively as shown below. Please note that Tom can only accept one offer and cannot

submit 2 development costs for the same offer (at distinct rates).

Figure-2: Decision Tree for Marsh Meadow

4. Decision Tree Analysis

The Decision Tree Analysis is a schematic representation of a number of decisions

and of opportunities. In a simple way, an analysis by the decision tree is called a tree-formed
 Decision Tree

graphical representation of investment decisions and the opportunity points that help to

examine possible outcomes. (V. and N., 2004)

The decision tree shows that decision points represented by squares are alternative

measures and the investment expenditures for the experimentation can be undertaken. These

choices are accompanied by chance issues represented by cycles, where the results depend on

the chance system. The results are unsure. Every chance point is therefore assigned the

likelihood of occurrence.

Figure-3: Example of Decision Tree Analysis

Once the decision tree is precisely described and data on the results and their

probabilities are collected, the alternative decisions can be assessed as follows: Start from the

far right end of the tree and start calculating the NPV in each point of chance as the tree

proceeds to the left.

When NPVs are calculated for each opportunity, assess the options in terms of their

NPV at the final decision-making phase.

Select the most NPV-powered option and cut the lower choice branch off. Assign

value to the chosen option to each choice point equal to the NPV.
 Decision Tree

Again, repeat the process, proceed left, recalculate the NPV for every opportunity

point, select the choice alternative with the highest NPV value and subsequently cut off the

branch of the lower alternative decision. Enter and repeat this process until a final decision is

reached at each point that is equivalent to the NPV of the selectable alternative.

The decision-tab analyze therefore enables the decision-maker to consider all the

necessary results before reaching a final investment decision.

5. Conclusion

The choice today should be created in view of the expected impact on future values

and choices and in view of the results of uncertain occurrences. As the decision today sets the

stage for tomorrow's decision, the decision today should balance the economy with flexibility

and balance the need to capitalize on the opportunities available to them to react to the future

conditions and needs.

From the results and findings, we are able to conclude that decision making treasures

provide a framework to quantify each potential decision result values and probability,

enabling decision-makers to choose the different alternatives in an educated way.

The decision-taking idea certainly does not provide final responses in the face of

uncertainty for managers to decide investments. We're not there and maybe we will never be.

Nevertheless, the idea is useful to illustrate the framework of investment choices and can also

provide greater assistance in assessing the possibilities for capital investments.

References

Safavian, S.R. and Landgrebe, D., 1991. A survey of decision tree classifier

methodology. IEEE transactions on systems, man, and cybernetics, 21(3), pp.660-674.

Friedl, M.A. and Brodley, C.E., 1997. Decision tree classification of land cover from

remotely sensed data. Remote sensing of environment, 61(3), pp.399-409.

Fan, G.Z., Ong, S.E. and Koh, H.C., 2006. Determinants of house price: A decision

tree approach. Urban Studies, 43(12), pp.2301-2315.

Gruis, V. and Nieboer, N., 2004. Strategic housing management: An asset

management model for social landlords. Property Management, 22(3), pp.201-213.