Decision Tree Financial Management

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Decision tree analysis

Decision tree analysis known as an analytical tool applied to decision-making under condition of uncertainty, also clarifying where there are many possible outcomes for various alternatives and some outcomes are dependent on previous outcomes. However, decision tree will present as a diagram by showing the relationship among possible courses of action, possible events and the potential outcomes for each course of action in the decision (Drury, 2012). So decision tree analysis is useful for merchant navy company to understand in what direction their chance events are and what their values in terms of profits and losses are for each of the two tooling alternatives, also visualize the outcomes of different prospects in order make better decision under uncertainty

Strengths of decision tree analysis

Decision tree analysis will show all the alternatives, probabilities, costs and the possible outcomes that are not even consider by the company. The company can add the possible scenario into decision tree diagram, through the diagram can calculate the expected values and a probability distribution in more complex situations and the attributes can be chosen in any desired order (Kirkwood, 2002).

Weaknesses of decision tree analysis

However decision tree analysis brings sequential decisions and class-overlap problem that including categorical variable with different number of levels, and the information gain in decision tree analysis are biased in favour of those attribute with more levels. Also correlated data and complex production rules will occur in decision tree analysis, it can get very complex particularly if many values are uncertain and/or if many outcomes are linked (Kirkwood, 2002).

Merchant navy industry background

Merchant navy industry plays an important role in both domestic trade and international trade by transporting goods or passengers via sea to all around the world. There are different types of shipping service and kinds...