Applications of sequential analysis: A tool for decision making in capital expenditures

Abstract

Scope and Method of Study: This report has been undertaken as an examination of the applications of sequential analysis as a tool for decision making in capital expenditures. In order to get an overall view of the capital expenditure decision, the report begins with the phases of application of this technique. It continues with the illustration of sequential analysis for three types of capital investments. They are a long-term asset, an incremental product addition, and for research and development.

Findings and Summary: The term decision tree is used as a synonym for the name of this technique. The branches of the decision tree represent alternative courses of action or decision. At the end of each branch is a reward which is the consequence of an alternative branch. By the use of the "carry back" technique and the "prime position value," alternatives can be analyzed. The criteria used in the decision process is the maximum discounted cash profit. Sequential analysis is a tool for the evaluation of uncertainties and risks involved with the different alternatives and opportunities open to the enterprise.