Dictionary of Accounting Terms: decision tree
decision tree
pictorial representation of a decision situation, normally found in discussions of decision-making under uncertainty or risk. It shows decision alternatives, states of nature, probabilities attached to the state of nature, and conditional benefits and losses. The tree approach is most useful in a sequential decision situation. For example, assume XYZ Corporation wishes to introduce one of two products to the market this year. The probabilities and present values (PV) of projected cash inflows follow:
| Products | Initial Investment | PV of Cash Inflows | Probabilities |
| A | $225,000 | 1.00 | |
| $ 450,000 | 0.40 | ||
| 200,000 | 0.50 | ||
| -100,000 | 0.10 | ||
| B | 80,000 | 1.00 | |
| 320,000 | 0.20 | ||
| 100,000 | 0.60 | ||
| -150,000 | 0.20 |
A decision tree analyzing the two products follows:
Based on the expected net present value, the company should choose product A over product B.
Dictionary of Banking Terms: decision tree
decision tree
- diagram in financial analysis showing the interaction of financial ratios, and how one ratio affects another ratio, allowing a financial analyst or bank examiner to see the cause and effect relationship in different ratios.
- credit scoring model that examines the interaction between different factors of credit, for example, a borrower's age, income, type of residence, by means of a tree-like chart. Differs from the more widely accepted point scoring analysis, which assigns points to each credit factor considered in approving or rejecting a credit application.
See illustration on next page.
Dictionary of Business Terms: decision tree
decision tree
diagram that illustrates all possible consequences of different decisions at different stages of decision making.
