E x e r c i s e

DecisionTrees
4
InthisExercise
BreakEvenAnalysis
TimeFactor
Duration:60minutes

DecisionScenario
YouareworkinginaRealEstatecompanyandyourbosswantsyoutogivesomethoughtonanew
realestateopportunity.Thereisapieceoflandinthetownthatcosts200.000andyourcompanyis
thinkingveryseriouslytobuyitasifthepropertyisabletoberezonedthenyouwillbeabletoresell
itfor250.000.Youhavesomeinformationandyoucanestimatethatthereis60%chancethatthe
propertywillberezonedifyouapplyforthat.Ifthereisnorezonethenyoucansellthepropertyfor
170.000 or you can go to the city council and ask to examine again the rezone of the property for
commercialuse,whichhasonly10%chancetosucceed.Applyingforthezoningchangecosts5000.
Isitworthtobuytheproperty?

SolutionusingDETRETUsoftware
OpenDETRETUandbuildtheDecisionTreemodel.MakeitlookliketheoneinFigure1.
Figure 1
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ClickmenuTree>Solvetosolvetheproblem.Thefollowingsolutionshouldappearinmaincanvasof
DETRETU.
Figure2

DETRETU suggests that you should invest in the property and request the rezone. Lets play now a
littlebitwithourtreemodel.

BreakEvenAnalysis
Sometimes it is quite useful to test some assumptions in your model and say how sensitive your
modelistothoseassumptionsandwhetheryoushouldspendtimerefiningthoseassumptions.Lets
assumethatyouwanttoknowhowlowyourchancesofgettingtherezoneapprovedmustbebefore
youwouldchangeyourdecision.Todothat,usetheBreakEvenAnalysistoolinDETRETU.
1. SelectnodeBuyPropertybyclickingonit.Havethenodeselected,clickmenuTree>BreakEven
AnalysistoopentheBreakEvenAnalysisdialogframeasisshowninFigure3.
2. InthefieldEqualinsertthevalue0.
3. In the field by changing leave the value Approved and click Next. DETRETU will calculate the
newprobabilityvalue41.56forselectednodeApproved.
4. LeavetheApplyprobabilityonmodelcheckboxcheckedandclickFinish.
5. A new tabbed canvas will be opened in DETRETUs main window with the name Break Even
Analysis1.

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Figure3

Figure4

6. Open again the tab Main Tree and check the results by changing the percentages of nodes
ApprovedandDeniedto40%and60%respectively.(Insert40%asavaluelowerthan41.56%)
7. ClickmenuSolve.DETRETUsuggestsDonothingasthebestsolution.

TheTimefactor.
Inthepreviousexercises wemadetheassumptionthatallthe nodesoccurinthesametimesothe
value of money remains steady. In reality this is not always the case as the time frame can be big
enough so you will have to take into consideration some factors that affect the value of money. In
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the Real Estate decision scenario if we assume that your application for rezoning will be accepted
afteroneyearthensomevaluesfromsomenodeshavetobechanged.
DETRETUhasautilityforexaminingsuchcases,usingthefollowingfunctionforchangingthevalueof
money:
P
n
(cosb, ycors) =
cosb
(1 + inlotion)
cus

Letsseehowthatutilityworksbyexaminingthefollowingscenario:
Assumethatthetimeframeforeachtreenodeisgivenbythefollowinglist:
Time Nodesaffected
0 Root,BuyProperty,ReqRezone
1 Approved,Denied,SellProperty,Appeal
2 Succeeds,Fails,Sell,Dump

1. HavingtheMainTreecanvasofDETRETUopened,clickonmenuTree>Clear.
2. ChangetheprobabilityofnodesApprovedandDeniedbackto60and40percent.
3. ClickSolvetosolvethetree.
4. ClickmenuTree>TimeFactortoopenthetimefactorframedialogasitisshowninFigure5.

Figure5

5. InthefieldNumberofyearsinsert3.
6. InthefieldInflationrateinsert7.
7. ClickNext.
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8. In the list select in the right column the right values for each node according to the
informationgivenpreviously.YoucanseesomeoftheentriesinFigure6.

Figure6
9. Click finish. A new tab is inserted in the main window of DETRETU. The tab in that frame
shows the tree solved using the nodes altered values using the time frame that each node
belongsto.Notethatineverynodethereisabluenumbershowingtheyearthateachnode
occurs.DETRETUsuggeststoDonothingthistime.YoucanseetheresultinFigure7.
Figure7

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