The term "formal financial model" can vary in interpretation, but typically it refers to structured quantitative methods used for financial analysis, often involving calculations and systematic approaches to investment decision-making.
In the context of the options provided:
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Profitability Index: A method to evaluate the attractiveness of an investment by comparing the present value of future cash flows to the initial investment.
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Equivalent Annuity: A way to convert the total value of an investment project into a consistent annual cash flow over time.
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External Rate of Return: This is often not as commonly defined as the others and is more associated with broader measures of return that may involve external factors affecting the firm's investment.
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Internal Rate of Return: A widely used method for estimating the profitability of potential investments, defined as the discount rate that makes the net present value of cash flows from an investment equal to zero.
Based on the general understanding of financial models, "External Rate of Return" is the one that doesn't fit as neatly into the structure of formal financial models compared to the others listed. It is less defined compared to the structured methods that the other three represent.