Cost-benefit calculations for appraisal

As discussed at the beginning of this section, the value of information from appraisal is the difference between the outcome of the decision with the information and the outcome of the decision without the information. 

There are two types of nodes in the decision tree decision nodes (rectangular) and chance nodes (circular). Decision nodes branch into a set of possible actions, while chance nodes branch into all possible results or situations. 

The decision tree can be considered as a road map which indicates the chronological order in which a series of actions will be performed, and shows several possible courses, only one of which will actually be followed. 

The tree is drawn by starting with the first decision to be taken, asking which actions are possible, and then considering all possible results from these actions, followed by considering future actions to be taken when these results are known, and so on. The tree is constructed in chronological order, from left to right. 

Then the values of the leaves are placed on the diagram, starting in the far most future the right hand side. The values represent the NPVs of the cash flows which correspond to the individual leaves. 

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