Decision-Tree Approach

Section referred, inter alia, to projects with dependent cash flow streams under "Behavior of cash flow through time".  It often happens that if the profits had been good in a certain year, the employees' morale is increased, management is enthused, clientele public takes a fancy to the firm's products and voluntarily serve as propagandists, and thus, the next year's cash flow has a good chance of being of a high magnitude. The same is me in construction industry too; as the proverb goes, fame travels before the name; if a particular prefab plant has caught the interests of the public, the cash flows in the next year are also good. In adversity also, this happens likewise; if a sewer line has breached this year, whatever the maintenance efforts taken, not only does the chance of disruption remain in the next year, but the public apprehension too persists in the next year. 

In such situations where decisions at one point of time affect the decisions of the firm at later dates also, the decision-tree approach is useful. It is quickly recognizable that this class of cash flow situations are the "dependent cash flow situations" described under Section. 

Decision-Tree approach develops joint probabilities at the terminal stage, after going through conditional probabilities in the intermediate stages since starting with independent probabilities in the initial stage. Starting from the initial stage, the sequential dependent cash flow in the next stage is studied; this follows likewise into the next stage; and so on till the final stage is reached.