USING TREEPLAN1 IN BUSINESS DECISION-MAKING
Michael P. Claudon, Professor of Economics
Middlebury College
1. ATTACHING TREEPLAN TO AN EXCEL DOCUMENT
1.
2.
3.
4.
5.
6.
Open Excel
Select the File menu and open the file named treeplan.xla.
Select Enable Macros in the dialogue box that appears.
Close the document that opened with Excel and open a new Excel document.
Select the Tools menu, and click on Decision Tree.
Click the New Tree tab in the dialogue box that appears.
TreePlan creates a tree diagram with one initial decision node and two decision
branches, as shown in Figure 1. The tree will appear with its upper left corner at the
active cell in the document.
Figure 1
Decision 1
0
0
0
1
0
Decision 2
0
0
0
TreePlan automatically labels the branches in the tree as Decision 1 and Decision 2.
These labels are changed later to more accurately describe the decisions in the
problem being analyzed.
1
TreePlan for Excel is a shareware product developed by Dr. Michael Middleton, McLaren School of
Business, University of San Francisco, San Francisco, CA. Dr. Middleton allows you to use TreePlan
without charge on a trial basis. If you like the software and plan to use it for more than 30 days, Dr.
Middleton requests that you register and pay a nominal registration fee. Dr. Middleton can be contacted at
via e-mail at [email protected].
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Using TreePlan
2. ADDING BRANCHES
Add a third decision branch to the tree by:
1. Clicking the decision node (the box containing 1 in Figure 1)
2. Pressing [Ctrl][t] to invoke TreePlan. A dialogue box titled appears.
The dialog box that appears depends on the cell that is selected when TreePlan is
invoked. The decision node dialogue box appears and displays the options for
working on a selected decision node. Different dialog boxes appear when an event
node or a terminal node is selected before TreePlan is invoked.
3. Selecting Add a Branch and press OK.
A third branch is added to the tree as shown in Figure 2.
Figure 2
Decision 1
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Decision 2
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Decision 3
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Add a fourth decision branch to the tree by following the same procedure:
1. Click the decision node cell (the box containing 1 in Figure 1)
2. Press [Ctrl][t] to invoke TreePlan
A fourth branch is added to the tree as shown in Figure 3.
3. ADDING EVENT NODES
Decision branches lead to event nodes, which lead to event branches. The next step is
adding event nodes and branches to the four decision leaves of Figure 3.
1. Select one of the four event nodes such as Event node 1 labeled in Figure 3.
2. Press [Ctrl][t] to invoke TreePlan. A dialog box appears that contains two
columns of choices – one untitled and Branches.
a. Select Change to event mode
b. Select Two in the Branches column
c. Click OK
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Using TreePlan
Figure 3
Decision 1
Event node 1
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Decision 2
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Decision 3
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Decision 4
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The result is shown in Figure 4. Decision 1 leads to an event node and then to Event 5
and Event 6. The 0.5 in the cells above the two events is the probability of that particular
outcome happening. By default, TreePlan assigns a probability of 50percent for each
event. As with all the other entries on the tree, these probabilities will be changed to
reflect the actual decision situation being analyzed.
Figure 4
0.5
Event 5
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Decision 1
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0.5
Event 6
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Decision 2
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Decision 3
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Decision 4
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Using TreePlan
The titles of the decision branches and event branches, and the probabilities have been
changed in Figure 5 to reflect the Magnolia Inns example.
Figure 5
0.4
Airport built at A
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0
Buy A
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0
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0.6
Airport built at B
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Buy B
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1
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Buy A & B
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Buy Nothing
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4. REPLICATING EVENT NODES
The Buy A event node and event branches can be copied to the Buy B and the Buy A & B
event nodes:
1.
2.
3.
4.
Select the event node to be copied – the Buy A event node in Figure 5.
Press lCtrl][t] to invoke TreePlan.
Select the Copy subtree option in the dialog box that appears.
Click OK.
You have now created a copy of the selected event node on the clipboard. To paste a
copy of this subtree into the decision tree:
1. Select the cell containing the desired event node.
2. Press [Ctrl][t] to invoke TreePlan.
3. Select Paste subtree option in the dialog box that appears.
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Using TreePlan
4. Click OK.
5. Replicating the event node to Buy A & B requires repeating the entire copy and
paste sequence.
The result is shown in Figure 6.
Figure 6
0.4
Airport built at A
0
Buy A
0
0
0
0
0.6
Airport built at B
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0.4
Airport built at A
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Buy B
1
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0.6
Airport built at B
0
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Buy A & B
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0
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Buy Nothing
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0
To complete the decision tree, repeat the pasting procedure for the Buy A & B event node
to arrive at Figure 7.
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Using TreePlan
Figure 7
0.4
Airport built at A
0
Buy A
0
0
0
0
0.6
Airport built at B
0
0
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0.4
Airport built at A
0
Buy B
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0.6
Airport built at B
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1
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0.4
Airport built at A
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Buy A & B
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0.6
Airport built at B
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Buy Nothing
0
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0
5. ADDING CASH FLOWS
The decision tree is completed once the cash flows associated with each decision and
event are added to the tree.
TreePlan reserves the first cell below each branch for entering the partial cash flow
associated with that branch. These cells are boxed and contain entries in bold type in
Figure 8.
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Using TreePlan
Thus, the –18 below the Buy A node is the cost of the land at location A, while the 31
below the event branch Airport build at A is the present value of the pay off to buying
land at location A, and the airport being build at location A.
If land is bought at location A and the airport is built at location B, the present value of
future cash flow is the Lt6 million market value of the land at location A once the airport
is built elsewhere.
Figure 8
0.4
Airport built at A
13
Buy A
31
-18
-2
13
0.6
Airport built at B
-12
6
-12
0.4
Airport built at A
-8
Buy B
4
-12
3.4
-8
0.6
Airport built at B
11
2
23
11
3.4
0.4
Airport built at A
5
Buy A & B
-30
35
1.4
5
0.6
Airport built at B
-1
29
-1
Buy Nothing
0
0
0
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Using TreePlan
6. MULTI-STAGE DECISION-TREES
Attach a basic decision tree to a new Excel document as described in section 1. Add
event branches to Decision 1 as described in section 3. The result is shown in Figure 9.
Figure 9
0.5
Event 3
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Decision 1
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0.5
Event 4
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1
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Decision 2
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The second stage of the decision process is introduced by adding a second level of
decision nodes to event branches Event 3.
1. Select the cell at the end of the Event 3 event branch.
2. Press [Ctrl][t] to invoke TreePlan. A dialog box appears that contains two
columns of choices – one untitled and one titled Branches.
a. Select Change to decision mode
b. Select Three in the Branches column
c. Click OK
The result is shown in Figure 10. Event 3 leads to a decision node and then to Decision 5,
Decision 6, and Decision 7, as is shown in Figure 10.
Adding event nodes and event branches to the three decision branches involves repeating
the above process.
1. Select the cell at the end of the Decison 5 event branch.
2. Press [Ctrl][t] to invoke TreePlan. A dialog box appears that contains two
columns of choices – one untitled and one titled Branches.
a. Select Change to event mode
b. Select Two in the Branches column
c. Click OK
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Using TreePlan
The result is shown in Figure 12. Decision 5 leads to an event node and then to Event 8
and Event 9. The default probabilities of 50 percent that are attached to these two events
will be changed when implementing the specific decision problem.
Figure 10
Decision 5
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0.5
Event 3
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Decision 6
1
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Decision 1
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Decision 7
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0.5
Event 4
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Decision 2
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Figure 11
0.5
Event 8
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Decision 5
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0.5
Event 9
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0.5
Event 3
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Decision 6
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Decision 1
Decision 7
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0.5
Event 4
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Decision 2
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Using TreePlan
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The Decision 5 event node and event branches are copied to the Decision 6 and Decision
7 event nodes as follows:
1. Select the event node to be copied – that at the end of the Decision 5 decision
branch in Figure 11.
2. Press lCtrl][t] to invoke TreePlan.
3. Select the Copy subtree option in the dialog box that appears.
4. Click OK.
You have now created a copy of the selected event node on the clipboard. To paste a
copy of this subtree into the decision tree:
1. Select the cell containing the desired event node – that at the end of decision
branch Decision 6.
2. Press [Ctrl][t] to invoke TreePlan.
3. Select Paste subtree option in the dialog box that appears.
4. Click OK.
5. Replicating the event node to Decision 7 requires repeating the entire copy and
paste sequence.
The result is shown in Figure 12. Note: Prior to beginning the replication process, Event
8 and Event 9 in Figure 11 were replaced by High R & D Costs and Low R & D Costs,
the final events of the Grant Proposal decision problem.
Adding the rest of the branch titles and the partial cash flows from the Grant Proposal
case results in the completed two-stage decision tree shown in Figure 13.
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Using TreePlan
Figure 12
0.5
High R&D Costs
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Microwave
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0
0.5
Low R&D Costs
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0.5
High R&D Costs
0.5
Receive Grant
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Cellular
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1
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0.5
Low R&D Costs
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0.5
High R&D Costs
Submit Proposal
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Infrared
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0.5
Low R&D Costs
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1
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0.5
Do Not Receive Grant
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Do Not Submit Proposal
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Figure 13
0.6
High R&D Costs
16000
Microwave
-4000
-60000
28000
16000
0.4
Low R&D Costs
46000
-30000
46000
0.2
High R&D Costs
0.5
Receive Grant
5000
Cellular
-70000
5000
3
85000
32000
-5000
29000
0.8
Low R&D Costs
35000
-40000
35000
0.1
High R&D Costs
Submit Proposal
-4000
Infrared
-5000
-80000
-4000
13500
-4000
32000
0.9
Low R&D Costs
36000
-40000
1
36000
0.5
Denied Grant
13500
-5000
0
-5000
Do not Submit Proposal
0
0
0