Decision Trees

Using TreePlan

16

16.1 TREEPLAN OVERVIEW
TreePlan is a decision tree add-in for Microsoft Excel 20072013 (Windows) and Microsoft Excel
2011 (Macintosh).
TreePlan helps you build a decision tree diagram in an Excel worksheet using dialog boxes.
Decision trees are useful for analyzing sequential decision problems under uncertainty. Your
decision tree model may include various controllable alternatives (e.g., whether to introduce a new
product, whether to bid on a new project) and uncontrollable uncertainties (e.g., possible demand
for a product, whether you're awarded a contract), arranged in chronological order. TreePlan
automatically includes formulas for summing cash flows to obtain outcome values and for
calculating rollback values for determining the optimal strategy.
To use TreePlan, you
(1) open a new worksheet,
(2) press Ctrl+Shift+T (or Option+Cmd+T) to build a new decision tree diagram,
(3) select a node to change the structure of your decision tree,
(4) enter branch names, cash flows, and probabilities, and
(5) determine the optimal strategy from TreePlan's results.
All of TreePlans functionality, including its built-in help, is a part of the TreePlan XLAM file.
There is no separate setup file or help file. When you use TreePlan on a Windows computer, it
does not create any Windows Registry entries (although Excel may use such entries to keep track
of its add-ins).
16.2 BUILDING A DECISION TREE IN TREEPLAN
With Windows Excel 2007 & 2010 & 2013, you can start TreePlan either by choosing Add-ins >
TreePlan Decision Tree or by pressing Ctrl+Shift+T (hold down the Ctrl and Shift keys and press
T).
With Mac Excel 2011, you can start TreePlan either by choosing Tools > TreePlan Decision
Tree from the menu or by pressing Option+Cmd+T (hold down the Option and Command keys
and press T).
If the worksheet doesn't have a decision tree, TreePlan prompts you with a dialog box with three
options; choose New Tree to begin a new tree. TreePlan draws a default initial decision tree with
its upper left corner at the selected cell. For example, the figure below shows the initial tree when
cell C3 is selected before creating the new tree. (Note that TreePlan writes over existing values in
19
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92 Chapter 16
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6 Decision Trees
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16.2
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6.3 ANAT
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6 Decision Trees
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16.3
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ese options.
196 Chapter 16 Decision Trees Using TreePlan
16.4 TREEPLAN INPUTS AND FORMULAS
Figure 16.7 Influence Chart of TreePlan Inputs and Formulas

Figure 16.8 Explanation of Formulas

16.5 STEP-BY-STEP TREEPLAN TUTORIAL
A decision tree can be used as a model for a sequential decision problems under uncertainty. A
decision tree describes graphically the decisions to be made, the events that may occur, and the
outcomes associated with combinations of decisions and events. Probabilities are assigned to the
events, and values are determined for each outcome. A major goal of the analysis is to determine
the best decisions.
Decision tree models include such concepts as nodes, branches, terminal values, strategy, payoff
distribution, certain equivalent, and the rollback method. The following problem illustrates the
basic concepts.
Branch Inputs Cell Formulas Defined Name
Optional
Optional
Cash Flow
Probability
Terminal Node
Endpoint Value
Event Node
Rollback Value
Decision Node
Choice Indicator
Decision Node
Rollback Value
RT (Risk Tolerance)
Location Formula
Endpoint Value
at Terminal Node
SUM of branch cash flows
Rollback Value
at Event Node
IF probabilities SUM to
approximately one, then SUM the
products of probabilities times
subsequent rollback values
Rollback Value
at Decision Node
MAX or MIN of subsequent rollback
values
Choice Indicator
at Decision Node
Nested IF functions
16.5 Step-by-Step TreePlan Tutorial 197
DriveTek Problem
DriveTek Research Institute discovers that a computer company wants a new storage device for a
proposed new computer system. Since the computer company does not have research people
available to develop the new storage device, it will subcontract the development to an independent
research firm. The computer company has offered a fee of $250,000 for the best proposal for
developing the new storage device. The contract will go to the firm with the best technical plan
and the highest reputation for technical competence.
DriveTek Research Institute wants to enter the competition. Management estimates a cost of
$50,000 to prepare a proposal with a fifty-fifty chance of winning the contract.
However, DriveTek's engineers are not sure about how they will develop the storage device if they
are awarded the contract. Three alternative approaches can be tried. The first approach is a
mechanical method with a cost of $120,000, and the engineers are certain they can develop a
successful model with this approach. A second approach involves electronic components. The
engineers estimate that the electronic approach will cost only $50,000 to develop a model of the
storage device, but with only a 50 percent chance of satisfactory results. A third approach uses
magnetic components; this costs $80,000, with a 70 percent chance of success.
DriveTek Research can work on only one approach at a time and has time to try only two
approaches. If it tries either the magnetic or electronic method and the attempt fails, the second
choice must be the mechanical method to guarantee a successful model.
The management of DriveTek Research needs help in incorporating this information into a
decision to proceed or not.
[Source: The storage device example is adapted from Spurr and Bonini, Statistical Analysis for
Business Decisions, Irwin.]
Nodes and Branches
Decision trees have three kinds of nodes and two kinds of branches. A decision node is a point
where a choice must be made; it is shown as a square. The branches extending from a decision
node are decision branches, each branch representing one of the possible alternatives or courses of
action available at that point. The set of alternatives must be mutually exclusive (if one is chosen,
the others cannot be chosen) and collectively exhaustive (all possible alternatives must be included
in the set).
There are two major decisions in the DriveTek problem. First, the company must decide whether
or not to prepare a proposal. Second, if it prepares a proposal and is awarded the contract, it must
decide which of the three approaches to try to satisfy the contract.
An event node is a point where uncertainty is resolved (a point where the decision maker learns
about the occurrence of an event). An event node, sometimes called a "chance node," is shown as
a circle. The event set consists of the event branches extending from an event node, each branch
representing one of the possible events that may occur at that point. The set of events must be
mutually exclusive (if one occurs, the others cannot occur) and collectively exhaustive (all
possible events must be included in the set). Each event is assigned a subjective probability; the
sum of probabilities for the events in a set must equal one.
The three sources of uncertainty in the DriveTek problem are: whether it is awarded the contract
or not, whether the electronic approach succeeds or fails, and whether the magnetic approach
succeeds or fails.
198 Chapter 16 Decision Trees Using TreePlan
In general, decision nodes and branches represent the controllable factors in a decision problem;
event nodes and branches represent uncontrollable factors.
Decision nodes and event nodes are arranged in order of subjective chronology. For example, the
position of an event node corresponds to the time when the decision maker learns the outcome of
the event (not necessarily when the event occurs).
The third kind of node is a terminal node, representing the final result of a combination of
decisions and events. Terminal nodes are the endpoints of a decision tree, shown as the end of a
branch on hand-drawn diagrams and as a triangle on computer-generated diagrams.
The following table shows the three kinds of nodes and two kinds of branches used to represent a
decision tree.
Figure 16.9 Nodes and Symbols
Type of Node Written Symbol Computer Symbol Node Successor
Decision square square decision branches
Event circle circle event branches
Terminal endpoint triangle or bar terminal value
Terminal Values
Each terminal node has an associated terminal value, sometimes called a payoff value, outcome
value, or endpoint value. Each terminal value measures the result of a scenario: the sequence of
decisions and events on a unique path leading from the initial decision node to a specific terminal
node.
To determine the terminal value, one approach assigns a cash flow value to each decision branch
and event branch and then sum the cash flow values on the branches leading to a terminal node to
determine the terminal value. In the DriveTek problem, there are distinct cash flows associated
with many of the decision and event branches. Some problems require a more elaborate value
model to determine the terminal values.
The following diagram shows the arrangement of branch names, probabilities, and cash flow
values on an unsolved tree.
F
T
br
th
B


F
igure 16.10 Dr
o build the dec
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Building the
1. Start w
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in Mac
press C
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New T
igure 16.11 Tr
Prepare propo
Don't prepare
riveTek Decisi
cision tree, you
ranch cash flow
each branch. As
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with a new work
n, choose Insert
cell A1. In Exc
c Excel 2011, c
Ctrl+Shift+T. In
nly to the Wind
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reePlan New T
0.5
Aw
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0.5
Not
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ion Tree Diagr
u use TreePlan
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cel 2007 & 201
choose Tools >
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decision node w
Tree Dialog Bo

arded contract
t awarded contract
ram
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probability (for
e tree diagram,
workbook is op
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10 & 2013, cho
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Use mechan
Try electronic
Try magnetic
16.5 Step-by-S
s to develop th
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ision Tree. Or,
tion+Cmd+T. S
eePlan New Tr
ches appears.
ical method
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5
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7
agnetic success
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agnetic failure
Tutorial 199

ou enter a
e and below
other cells.
workbook
cision Tree;
ows version,
structions
click the
$80,000
$150,000
$30,000
$120,000
$0
-$50,000
$0
20
F

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00 Chapter 16
igure 16.12 In
3. Select c
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igure 16.13 Br
4. Select c
Change
igure 16.14 Tr
1
2
3
4
5
6
7
8
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A B
1
0
1
2
3
4
5
6
7
8
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6 Decision Trees
nitial Decision T
cell D2, and en
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reePlan Termin
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Alternative 1
0
Alternative 2
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C D
Prepare propos
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Don't prepare p
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Ctrl+Shift+T. I
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0
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sal
-500
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proposal
0

proposal. Selec
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In the TreePlan
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0
0
000
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ct cell D4, and
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d click OK. Th
enter 50000.
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Select cell
select
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16.5 Step-by-Step TreePlan Tutorial 201
Figure 16.15 Initial Event Branches

5. Select cell H2, and enter Awarded contract. Select cell H4, and enter 250000. Select cell
H7, and enter Not awarded contract.
Figure 16.16 Event Branches With Names and Cash Flow

6. Select cell J 3. Press Ctrl+Shift+T. In the TreePlan Terminal Node dialog box, select
Change To Decision Node, select Three Branches, and click OK. The tree is redrawn.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
A B C D E F G H I J K
0.5
Outcome 3
-50000
Prepare proposal 0 -50000
-50000 -50000 0.5
Outcome 4
-50000
2 0 -50000
0
Don't prepare proposal
0
0 0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
A B C D E F G H I J K
0.5
Awarded contract
200000
Prepare proposal 250000 200000
-50000 75000 0.5
Not awarded contract
-50000
1 0 -50000
75000
Don't prepare proposal
0
0 0
202 Chapter 16 Decision Trees Using TreePlan
Figure 16.17 Subsequent Decision Branches

7. Select cell L2, and enter Use mechanical method. Select cell L4, and enter 120000.
Select cell L7, and enter Try electronic method. Select cell L9, and enter 50000. Select
cell L12, and enter Try magnetic method. Select cell L14, and enter 80000.
Figure 16.18 Subsequent Decision Branches With Names and Cash Flows

8. Select cell N8. Press Ctrl+Shift+T. In the TreePlan Terminal Node dialog box, select
Change To Event Node, select Two Branches, and click OK. The tree is redrawn.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
A B C D E F G H I J K L M N O
Alternative 5
200000
0 200000
0.5
Awarded contract Alternative 6
1 200000
250000 200000 0 200000
Prepare proposal Alternative 7
200000
-50000 75000 0 200000
0.5
Not awarded contract
1 -50000
75000 0 -50000
Don't prepare proposal
0
0 0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
A B C D E F G H I J K L M N O
Use mechanical method
80000
-120000 80000
0.5
Awarded contract Try electronic method
2 150000
250000 150000 -50000 150000
Prepare proposal Try magnetic method
120000
-50000 50000 -80000 120000
0.5
Not awarded contract
1 -50000
50000 0 -50000
Don't prepare proposal
0
0 0
16.5 Step-by-Step TreePlan Tutorial 203
Figure 16.19 Branches for Electronic Method Uncertainty

9. Select cell P7, and enter Electronic success. Select cell P12, and enter Electronic
failure. Select cell P14, and enter 120000.
Figure 16.20 Branch Names and Cash Flows for Electronic Method Uncertainty

10. Select cell N18. Press Ctrl+Shift+T. In the TreePlan Terminal Node dialog box, select
Change To Event Node, select Two Branches, and click OK. The tree is redrawn.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
A B C D E F G H I J K L M N O P Q R S
Use mechanical method
80000
-120000 80000
0.5
Outcome 8
0.5 150000
Awarded contract Try electronic method 0 150000
2
250000 150000 -50000 150000 0.5
Outcome 9
150000
0 150000
Prepare proposal
-50000 50000 Try magnetic method
120000
-80000 120000
0.5
1 Not awarded contract
50000 -50000
0 -50000
Don't prepare proposal
0
0 0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
A B C D E F G H I J K L M N O P Q R S
Use mechanical method
80000
-120000 80000
0.5
Electronic success
0.5 150000
Awarded contract Try electronic method 0 150000
3
250000 120000 -50000 90000 0.5
Electronic failure
30000
-120000 30000
Prepare proposal
-50000 35000 Try magnetic method
120000
-80000 120000
0.5
1 Not awarded contract
35000 -50000
0 -50000
Don't prepare proposal
0
0 0
204 Chapter 16 Decision Trees Using TreePlan
Figure 16.21 Branches for Magnetic Method Uncertainty

11. Select cell P16, and enter .7. Select cell P17, and enter Magnetic success. Select cell
P21, and enter .3. Select cell P22, and enter Magnetic failure. Select cell P24, and enter
120000.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
A B C D E F G H I J K L M N O P Q R S
Use mechanical method
80000
-120000 80000
0.5
Electronic success
150000
0.5 Try electronic method 0 150000
Awarded contract
3 -50000 90000 0.5
250000 120000 Electronic failure
30000
-120000 30000
0.5
Outcome 10
Prepare proposal 120000
Try magnetic method 0 120000
-50000 35000
-80000 120000 0.5
Outcome 11
120000
0 120000
1 0.5
35000 Not awarded contract
-50000
0 -50000
Don't prepare proposal
0
0 0
16.5 Step-by-Step TreePlan Tutorial 205
Figure 16.22 Complete Diagram Before Formatting

12. Double-click the sheet tab (or right-click the sheet tab and choose Rename from the
shortcut menu), and enter Original. Save the workbook.
Interpreting the Results
The $30,000 terminal value on the far right of the diagram in cell S13 is associated with the
following scenario:
Figure 16.23 Evaluation of a Scenario

Branch Type Branch Name Cash Flow
Decision Prepare proposal $50,000
Event Awarded contract $250,000
Decision Try electronic method $50,000
Event Electronic failure (Use mechanical method) $120,000
Terminal value $30,000

TreePlan put the formula =SUM(P14,L11,H12,D20) into cell S13 for determining the terminal
value.
Other formulas, called rollback formulas, are in cells below and to the left of each node. These
formulas are used to determine the optimal choice at each decision node.
In cell B26, a formula displays 1, indicating that the first branch is the optimal choice. Thus, the
initial choice is to prepare the proposal. In cell J 11, a formula displays 2, indicating that the
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
A B C D E F G H I J K L M N O P Q R S
Use mechanical method
80000
-120000 80000
0.5
Electronic success
150000
0.5 Try electronic method 0 150000
Awarded contract
2 -50000 90000 0.5
250000 90000 Electronic failure
30000
-120000 30000
0.7
Magnetic success
Prepare proposal 120000
Try magnetic method 0 120000
-50000 20000
-80000 84000 0.3
Magnetic failure
0
-120000 0
1 0.5
20000 Not awarded contract
-50000
0 -50000
Don't prepare proposal
0
0 0
20
se
co
ab
F
Th
m


F

06 Chapter 16
econd branch (n
ontract, DriveT
bout interpretat
Formatting
he following st
may choose to u
13. From th
Move O
dialog b
14. On she
Ctrl+Sh
with Pr
Align L
igure 16.24 Tr
15. Select c
option
cash flo
With th
Cells d
(zero) f
Numbe
6 Decision Trees
numbered 1, 2
Tek should try
tion.
the Tree D
teps show how
use other forma
he Edit menu,
Or Copy from
box, check the
eet Original (2)
hift+T. In the T
robabilities is s
Left button.
reePlan Select
cell H12. Press
button for Cell
ow cells select
hose cells still
dialog box, clic
for Decimal Pl
ers. Click OK.
Using TreePlan
, and 3, from to
the electronic m
Diagram
w to use TreePl
ats for your ow
choose Move o
the shortcut m
e Create A Cop
, if the probabi
TreePlan Selec
selected, and cl
Dialog Box
s Ctrl+Shift+T
ls with Partial
ed, if the cash
selected, choos
k the Number
laces; select $ i
op to bottom) i
method. A sub
an and Excel f
wn tree diagram
or Copy Sheet
menu). In the low
py box, and clic
ilities are not le
ct dialog box, v
lick OK. With
. In the TreePl
Cash Flows is
flows are not l
se Home >For
tab. In the Cat
in the Symbol l
is the optimal c
bsequent chapte
features to form
ms.
(or right-click
wer left corner
ck OK.
eft-aligned, sel
verify that the o
all probability

lan Select dialo
selected, and c
left-aligned, cli
rmat >Format
tegory list box,
list box; select
choice. If awar
er provides mo
mat the tree dia
k the sheet tab a
r of the Move O
lect cell H9. Pr
option button f
y cells selected,
og box, verify t
click OK. With
ick the Align L
Cells. In the F
, choose Curren
t -$1,234 for N
rded the
ore details
agram. You
and choose
Or Copy
ress
for Cells
, click the
that the
h all partial
Left button.
Format
ncy; type 0
Negative
F


igure 16.25 Ex
16. Select c
option
rollbac
above.
17. Select c
option
value c
above.
xcel Format Ce
cell I12. Press
button for Cell
k cells selected
cell S3. Press C
button for Cell
cells selected, c
ells Dialog Box
Ctrl+Shift+T.
ls with Rollbac
d, choose Form
Ctrl+Shift+T. I
ls with Termin
choose Format
x
In the TreePla
ck EVs/CEs is
mat >Cells. Re
In the TreePlan
nal Values is se
>Cells. Repea
16.5 Step-by-S

an Select dialog
selected, and c
epeat the Curre
n Select dialog
elected, and cli
at the Currency
Step TreePlan Tu
g box, verify th
click OK. With
ency formatting
g box, verify th
ick OK. With a
y formatting of
Tutorial 207
hat the
h all
g of step 16
hat the
all terminal
f step 16
208 Chapter 16 Decision Trees Using TreePlan
Figure 16.26 Complete DriveTek Decision Tree

18. Double-click the Original (2) sheet tab (or right-click the sheet tab and choose Rename
from the shortcut menu), and enter Formatted. Save the workbook.
Displaying Model Inputs
When you build a decision tree model, you may want to discuss the model and its assumptions
with co-workers or a client. For such communication it may be preferable to hide the results of
formulas that show rollback values and decision node choices. The following steps show how to
display only the model inputs.
19. From the Edit menu, choose Move or Copy Sheet (or right-click the sheet tab and choose
Move Or Copy from the shortcut menu). In the lower left corner of the Move Or Copy
dialog box, check the Create A Copy box, and click OK.
20. On sheet Formatted (2), select cell B1. Press Ctrl+Shift+T. In the TreePlan Select dialog
box, verify that the option button for Columns with Nodes is selected, and click OK.
With all node columns selected, choose Format >Cells >Number or Home >Format >
Format Cells >Number. In the Category list box, select Custom. Select the entry in the
Type edit box, and type ;;; (three semicolons). Click OK.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
A B C D E F G H I J K L M N O P Q R S
Use mechanical method
$80,000
-$120,000 $80,000
0.5
Electronic success
$150,000
0.5 Try electronic method $0 $150,000
Awarded contract
2 -$50,000 $90,000 0.5
$250,000 $90,000 Electronic failure
$30,000
-$120,000 $30,000
0.7
Magnetic success
Prepare proposal $120,000
Try magnetic method $0 $120,000
-$50,000 $20,000
-$80,000 $84,000 0.3
Magnetic failure
$0
-$120,000 $0
1 0.5
$20,000 Not awarded contract
-$50,000
$0 -$50,000
Don't prepare proposal
$0
$0 $0
F
E
se
va
do
th
fo
fo


P


igure 16.27 Ex
xplanation: A
eparated by sem
alues, and text,
oes not display
he cell, but its r
ormat without h
ormats are save
21. Select c
option
rollbac
Cells >
list box
22. Double
from th
Printing the
23. In the N
24. To prin
& 2010
Button
tab; for
option
Header
approp
xcel Format Ce
custom numbe
micolons, and t
, in that order.
y positive numb
result is not dis
having to enter
ed with the wor
cell A27. Press
button for Cell
k values select
>Number. In th
x, and select th
e-click the Form
he shortcut men
e Tree Diag
Name Box list
nt the tree diagr
0 & 2013, choo
or File >Print
r Orientation cl
button for Fit T
r list box select
riate headers a
ells Dialog Box
er format has fo
they define the
When you spe
bers, negative n
splayed. Later,
r the formula a
rkbook unless
s Ctrl+Shift+T
ls with Rollbac
ted, choose For
he Category lis
e three-semico
matted (2) shee
nu), and enter M
gram
box, select Tre
ram from Exce
ose Page Layou
t Preview >Pa
lick the option
To 1 Page Wid
t None, and in
and footers). Cl
x
our sections of
e formats for po
ecify three sem
numbers, zero
if you want to
gain. Editing a
you explicitly
. In the TreePl
ck EVs/CEs is
rmat >Cells >
st box, select C
olon entry. Clic
et tab (or right-
Model Inputs
eeDiagram (or
el, with the tree
ut >Print Area
ge Setup. In th
button for Lan
de By 1 Page T
the Footer list
lick the Sheet t
16.5 Step-by-S

f format codes.
ositive number
micolons withou
values, or text
o display the re
an existing form
delete a forma
lan Select dialo
selected, and c
Number or Ho
Custom. Scroll
ck OK.
-click the sheet
. Save the wor
select cells A1
e diagram rang
a >Set Print Ar
he Page Setup d
ndscape, and fo
Tall. Click the H
box select Non
tab; clear the c
Step TreePlan Tu
The sections a
rs, negative num
ut format codes
t. The formula
esult, you can c
mat does not de
at.
og box, verify t
click OK. With
ome >Format
to the bottom o
t tab and choos
rkbook.
1:S34).
ge selected, in E
rea. Then choo
dialog box, clic
or Scaling click
Header/Footer
ne (or select ot
check box for G
Tutorial 209
are
mbers, zero
s, Excel
remains in
change the
elete it. All
that the
h all
>Format
of the Type
se Rename
Excel 2007
ose Office
ck the Page
k the
tab; in the
ther
Gridlines,
210 Chapter 16 Decision Trees Using TreePlan
and clear the check box for Row And Column Headings. Click OK. Choose File >Print
and click OK.
25. To print the tree diagram from Word, clear the check boxes for Gridlines and for Row
And Column Headings on Excels Page Setup dialog box Sheet tab. Select the tree
diagram range. In Excel 2007 & 2010 & 2013, choose Home >Paste >As Picture >
Copy as Picture. In the Copy Picture dialog box, click the option button As Shown When
Printed, and click OK. In Word select the location where you want to paste the tree
diagram and choose Edit >Paste.
Figure 16.28 DriveTek Without Rollback Values

Alternative Model
If you want to emphasize that the time constraint forces DriveTek to use the mechanical approach
if they try either of the uncertain approaches and experience a failure, you can change the terminal
nodes in cells R13 and R23 to decision nodes, each with a single branch.
Use mechanical method
$80,000
-$120,000
0.5
Electronic success
$150,000
0.5 Try electronic method $0
Awarded contract
-$50,000 0.5
$250,000 Electronic failure
$30,000
-$120,000
0.7
Magnetic success
Prepare proposal $120,000
Try magnetic method $0
-$50,000
-$80,000 0.3
Magnetic failure
$0
-$120,000
0.5
Not awarded contract
-$50,000
$0
Don't prepare proposal
$0
$0
F
1
Tr
ev
ut
fo
F
Fo
an
ex
Tr
fu
w
R
co
igure 16.29 Al
6.6 EXPO
reePlan's defau
vent node and m
tilities in TreeP
ormulas for com
igure 16.30 Tr
or the Maximiz
nd CE =-LN((
xponential utili
reePlan uses th
unction. The na
worksheet when
RT=999999999
ommand.
Prepare
-$50,000
Don't pre
$0
lternative Driv
ONENTIA
ult is to rollbac
maximum of s
Plan's Options
mputing the uti
reePlan Option
ze option with
A-EU)/B)*RT
ity, the formula
he name RT to
ames A and B d
n you choose to
999. You can c
0.5
Awa
$250
proposal
0
0.5
Not
$0
epare proposal
veTek Decision
AL UTILITY
ck the tree usin
uccessor value
dialog box, Tr
ility and certain
ns Dialog Box
exponential ut
T, where X and
as are U =A-B
represent the r
determine scal
o use exponent
change the valu
arded contract
0,000
awarded contract
n Tree
Y AND TR
g expected val
es at a decision
reePlan will red
n equivalent at

tility, the rollba
EU are cell re
B*EXP(X/RT)
risk tolerance p
ing. If the nam
tial utility, they
ues of the nam
Use mechanical method
-$120,000
Tryelectronic method
-$50,000
Trymagnetic method
-$80,000
16.6 Exponenti
REEPLAN
lue (probability
n node. If you c
draw the decisi
t each node.
ack formulas a
eferences. For t
and CE =LN(
parameter of th
mes A, B, and R
y are initially d
mes using the In
0.5
Electronic success
$0
0.5
Electronic failure
$0
0.7
Magnetic success
$0
0.3
Magnetic failure
$0
ial Utility and Tre
N
y-weighted ave
choose to use e
ion tree diagram
are U =AB*E
the Minimize o
((A-EU)/B)*RT
he exponential
RT don't exist o
defined as A=1
nsert >Name >
Use mechanical
1
-$120,000
Use mechanical
1
-$120,000
eePlan 211

erage) at an
exponential
m with
EXP(X/RT)
option with
T.
utility
on the
, B=1, and
>Define
$80,000
$150,000
method
$30,000
$120,000
method
$0
-$50,000
$0
212 Chapter 16 Decision Trees Using TreePlan
16.7 ACKNOWLEDGEMENT
TreePlan was developed by Professor Michael R. Middleton at the University of San Francisco
(using the Excel 4 XLM macro programming language) and modified for use at Fuqua (Duke
University) by Professor J ames E. Smith. Mike Middleton rewrote portions using VBA during
2008-2014.