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The Use of Cost and Time in Project Decision Trees: A model and an application

Author

Listed:
  • Pedro Godinho

    (Faculty of Economics, University of Coimbra)

  • João Paulo Costa

    (Faculty of Economics, University of Coimbra)

Abstract

In this paper we present a useful bicriteria model for project analysis based on decision trees, and an application of the model to a production planning problem. We start by presenting a model that allows the use of time and cost in project analysis. This model is easy to use, and it can be applied to a large number of real-life situations when the main objectives are the minimisation of cost and the minimisation of time. The construction of the decision trees for this model may require large computational times, and thus become impracticable. We deal with this problem in two ways: first, we define an algorithm for generating the strategies, and then we introduce an error parameter, which allows us to avoid generating all the strategies that are very close to each other. Finally, we apply the model to a production planning problem. We define the problem, use the algorithm to identify the efficient strategies and analyse the results.

Suggested Citation

  • Pedro Godinho & João Paulo Costa, 2004. "The Use of Cost and Time in Project Decision Trees: A model and an application," Notas Económicas, Faculty of Economics, University of Coimbra, issue 20, pages 145-161, December.
    • Handle: RePEc:gmf:journl:y:2004:i:20:p:145-161
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    References listed on IDEAS

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    1. Pedro Cortesao Godinho & Joao Paulo Costa, 2002. "A note on the use of bicriteria decision trees in capital budgeting," Global Business and Economics Review, Inderscience Enterprises Ltd, vol. 4(1), pages 147-158.
    2. James E. Smith & Kevin F. McCardle, 1998. "Valuing Oil Properties: Integrating Option Pricing and Decision Analysis Approaches," Operations Research, INFORMS, vol. 46(2), pages 198-217, April.
    3. Trigeorgis, Lenos, 1993. "The Nature of Option Interactions and the Valuation of Investments with Multiple Real Options," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(1), pages 1-20, March.
    4. James E. Smith & Robert F. Nau, 1995. "Valuing Risky Projects: Option Pricing Theory and Decision Analysis," Management Science, INFORMS, vol. 41(5), pages 795-816, May.
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