The cash flow associated with each alternative is also listed. The four branches coming out of this decision node represent the four alternatives under consideration.
In Figure 1, a single decision node (node 0) represents the decision ImmoTop faces about where to buy land. Branches emanating from a decision node represent the different alternatives for a particular decision. A square node is a called a decision node because it represents a decision. As shown in Figure 1, a decision tree is composed of a collection of nodes (represented by circles and squares) interconnected by branches (represented by lines). Figure 1 shows the decision problem for ImmoTop represented in this format. DECISION TREES Decision problems can be represented in a graphical form known as a decision tree. If the land is not purchased now, it will not be available to ImmoTop later. If land is purchased and the ski resort is not built in that location, the land is resold at a loss. Real Estate Acquisition Analysis Parcel of land near location Current purchase price Present value of future cash flows if resort is built at this location Present value of future sales price of parcel if the resort is not built at this location (Note: all values are in thousands of euros.) ImmoTop can purchase land now either at site A only, at site B only, or at both. Current prices and estimated future values of developable land are summarized in the table below. To this end, they have identified parcels of land near the two sites. ImmoTop, a private real estate developer, would like to build housing units near the new ski resort. Land values around the two possible sites are increasing as investors speculate that property values will go up sharply in the vicinity of the new resort. A final decision on the location of the resort is not expected to be made for another year. The regional council is currently conducting economic and environmental studies on the merits of the two sites. Two possible sites have been identified for this resort.
Example problem A group of towns in the Pyrénées mountains intends to develop a ski resort.
The following example problem is used to illustrate the modeling tools. INTRODUCTION This document provides a basic introduction to decision tree modeling and the use of the TreePlan Excel add-in for building decision tree models. 1 A tutorial introduction to TreePlan Prepared by Professor Philippe DelquiéĢ TreePlan Tutorial 2 1.