An Economic Model Is

question 139

Multiple Choice

An economic model is

• A)tested by examining the realism of its assumptions.
• B)useful if it predicts well,even if its assumptions are not realistic.
• C)tested by the Testing Committee of the Canadian Economic Association.
• D)not useful unless it predicts with 100 percent accuracy.
• E)not useful because it simplifies real problems.

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Definitions:

Profitability Index

A calculation used to determine the relative profitability of an investment, defined as the present value of future cash flows divided by the initial investment cost.

Discount Rate

The discount rate used in DCF method to establish the current worth of future financial flows.

Independent Projects

Investment projects that do not affect the cash flows or feasibility of other projects under consideration.

Profitability Index

A financial metric used to evaluate the potential profitability of an investment, calculated as the present value of future cash flows divided by the initial investment cost.