Decision Tree Analysis Applied to Capacity Expansion

Linear programming and computer simulation models focus on the short term question of how to use existing capacity. But the planner alsofaces long terms decisions. One such decision has to do with capacity expansion. One technique for analysis this and other sequential decisions is decisions tree analysis.
 Decision tree analysis comprises the followings steps:

A.Tree Diagramming

1. Identify all decisions points and the order s(sequence ) in which they occur.
2. Identify alternative decisions for each decision point.
3. Identify the change events that can occur after each decisions]
4. Develop a tree diagram showing the sequence of decisions and change event

B.Estimation

1. Estimate the probability for each possible outcome of each change event.
2. Estimate the financial consequence of each possible outcome and decisions alternative .

C.Evaluation and Selection

1. Calculate the expected valued of each decisions alternative
2. Select the decisions alternative offering the most attractive expected value.