2. An approximate indication of the relative
importance of the in-
dependent variables in affecting the
dependent variable is also given
visually, as in Charts A and B, by the amount
of scatter (i.e., degree of
correlation) in the separate charts after
co
sion line in Chart A would then be plotted
about the regression line in
Chart B against the same X 2 values, and this
time a new regression line on
Chart B would again be drawn through the
filled-in square. This new re-
gression line on Chart B would repr
more independent variables are employed,
the process is known as multi-
ple correlation. Conceptually, the functional
relationship is expressed
symbolically as Y = f (Xi, X 2 ) where two
independent variables are con-
cerned, or further X's may be include
eluding further variables improves the ability
of the equation to predict
changes in Y due to variations in each of the
X's. The value of a is the
constant term in the equation and is equal to
zero when the estimating line
passes through the origin. The r
erly be ignored, in theory, only when 7; is
infinitely large; but, in practice,
the payout reciprocal would appear to be a
very satisfactory estimate of r
in all cases where the project life is
"substantially" greater than the pay-
out period. We will see
per cent, so that the estimated future dollar
flows have the same value in
the present as they will have in the future. In
the succeeding columns,
since the discounting rates are all greater
than zero, the present values
of the future dollar flows will al
The basic cash flow data are given in the
second column, headed
"Cash Flows." The O/R ratios for this column
have been computed, for
each of the project lives (10, 12, 13, and 15
years respectively), by divid-
ing the total outlay of $10,000 by the full-l
is that rate which equates the present value
of outlays with the present
value of cash earnings over the life of the
project, then the ratio of these
flows, when discounted at the true rate of
return, is equal to unity. To
determine this rate, it becomes