Financing for a large construction project was provided by a group of

Question

Financing for a large construction project was provided by a group of banks. When the money was gone before the project was completed, the banks approved additional loans. Now, with funds used up again and completion still not at hand, the banks refuse to extend further loans, although without those loans, the project is doomed.

Which of the following, if true, best explains why the bank’s current reaction is different from their reaction in the previous instance of depletion of funds?

A. The banks have reassessed the income potential of the completed project and have concluded that total income generable would be less than total interest due on the old plus the needed new loans. 
B. The banks have identified several other projects that offer faster repayment of the principal if loans are approved now to get those projects started. 
C The banks had agreed with the borrowers that the construction loans would be secured by the completed project. 
D. The cost overruns were largely due to unforeseeable problems that arose in the most difficult phase of the construction work. 
E. The project stimulated the development and reﬁnement of several new construction techniques, which will make it easier and cheaper to carry out similar projects in the future.

Source:  Experts Global 
Difficulty Level:   600

DavidTutorexamPAL · Answer

The answer is B.

Although A is also tempting, it is not the answer: what's relevant now is if the income of the project will be enough to repay the current loan (plus interest). That's what will affect whether the bank makes this new loan - not whether it can repay old loans. (especially if not providing the new loan may mean that the old one won't be repaid either...) in other words, what's relevant is if giving a new loan will increase or decrease the amount that will be repaid, and if this repayment is the best thing the bank can do with its money. A doesn't tell us this... insufficient. 
B, on the other hand, tells us the most relevant thing: the bank will get more for its money in a different project. If this is the case, they have no reason to give the loan. This is the answer!

surendrasaini1 · Answer

Financing for a large construction project was provided by a group of banks. When the money was gone before the project was completed, the banks approved additional loans. Now, with funds used up again and completion still not at hand, the banks refuse to extend further loans, although without those loans, the project is doomed.

Which of the following, if true, best explains why the bank’s current reaction is different from their reaction in the previous instance of depletion of funds?

A. The banks have reassessed the income potential of the completed project and have concluded that total income generable would be less than total interest due on the old plus the needed new loans.(Contender)
B. The banks have identified several other projects that offer faster repayment of the principal if loans are approved now to get those projects started.(what if banks have identified other projects with early repayments,they may finance them along with this current project)
C The banks had agreed with the borrowers that the construction loans would be secured by the completed project.(if loans are secured then banks should finance the project)
D. The cost overruns were largely due to unforeseeable problems that arose in the most difficult phase of the construction work.(it gives the reason for increase in cost not why banks stopped financing the project)
E. The project stimulated the development and reﬁnement of several new construction techniques, which will make it easier and cheaper to carry out similar projects in the future.(relevant for future projects)

I will go with choice A

Thanks

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Abhishek009 · Answer

+1 for (A)

The banks have reassessed the income potential of the completed project and have concluded that total income generable would be less than total interest due on the old plus the needed new loans.

If we negate this statement we have

The banks have reassessed the income potential of the completed project and have concluded that total income generable would be more than/equal to the total interest due on the old plus the needed new loans.

In this case the Banks will not have any issue in advancing the Borrower...

Thus, IMHO answer should be (A)

surendrasaini1 · Answer

banks have identified other projects with faster repayment that's why they have stopped financing the current project.but, if banks do not extend financial support to current project then this current project will doom, and the amount invested so far by banks will also get vanished.

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Gmatprep550 · Answer

DavidTutorexamPAL  I feel B should not be OA as it doesn't say at all that why they can not fund 2 different projects (old and new), they will get more money from new project so they will invest there but they also need to recover money from old project as it will fail if they will not approve new loan and bank will not get return of loan they gave in past.

Could you please clear my above doubt.

Thanks.

viv007 · Answer

Does not B says that banks have limited funds means that banks will able to fund only one project in current situation, this is odd w.r.t banks so i think A is winner over B.

Huahua1987 · Answer

B is actually a trap. Fast repayment of loan doesn’t necessarily tell you the desired interest is included. If the fast repayment of loan consists of mainly loan principal balance then the bank will have very minimum interest income. Why will the bank care about the minimum interest then when B doesn’t even tell you what went wrong in the old projects.

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Posted from my mobile device

dumbodingo · Answer

Argument - The construction project overshot the budget. Bank paid once, but refuses to pay any more.

Couple of reasons for the change in stance may include - some policy that says can't pay more than once, a possibility of finding out budget mismanagement, or something that points to a bad investment for the bank.

A - The only option that explains from the bank's point of view why it may not be feasible for it to continue to pay in excess of the initially approved loan anymore. 
B - is tempting, but not a rational explanation as to why it is okay for the bank to stop payments midway. 
C - provides information about a clause in the loan agreement, unrelated to bank's decision.
D - explains the reasons behind cost overrun, again unrelated. 
E - talks about construction techniques, totally unrelated.

lshorter2698 · Answer

I can see the answer is A, but this doesn't make sense in my opinion. It says, "The banks have reassessed the income potential of the completed project and have concluded that total income generable would be less than total interest due   on the old plus the needed new loans.  " Doesn't this mean that the profit they're considering takes into account the "new needed loans", doesn't that mean they would be inclined to grant those loans, so that they gain that income? Besides, interest payments on the previous debt wouldn't suddenly go away if they issue new debt. In my mind, this would be reason to issue more, not deny the loan. Could someone please rebuttal?

AbhishekP220108 · Answer

Since it has been recommended that we cant bring outside information however to solve CR we can use the experience which helps better in visualising how the argument is formed and what the author is thinking.

Here's a breakdown of the logic to find the correct answer.
​The correct answer is A.
​Why This Is the Correct Answer
​Identify the Core Problem: The puzzle is explaining the change in the banks' behavior.
​Past: Money ran out \rightarrow Banks gave more loans.
​Present: Money ran out again \rightarrow Banks refuse more loans.
​Analyze the Bank's Motivation: A bank's primary goal is to get its money back, plus interest. Every decision is a calculation of risk vs. reward.
​In the Past (First Time): When the project needed more money, the banks must have calculated that the final, completed project would still be valuable enough to pay back the original loan + the new loan. It was still a good investment.
​In the Present (Second Time): Now, they are refusing. This logically means their calculation has changed. They must now believe that the project is a "lost cause"—that even if they lend more money to complete it, the project's total income will never be enough to pay back the total mountain of debt (original loan + first new loan + this new loan).
​Evaluate Option A:
​A. The banks have reassessed the income potential of the completed project and have concluded that total income generable would be less than total interest due on the old plus the needed new loans.
​This directly matches our analysis. The banks did the math. They realized the project is now a "black hole" for money. The total debt is already greater than the best-case-scenario income from the completed project. Lending more money won't fix this; it just increases the bank's total loss. This is the classic "throwing good money after bad" scenario, and it perfectly explains why they would stop.
​Why the Other Options Are Incorrect
​B. The banks have identified several other projects... This is about opportunity cost. While it might make the banks less enthusiastic about this project, it doesn't explain why they would doom it. Banks can fund multiple projects. The core reason to abandon this project must be about this project's own financial failure, not about a better project elsewhere.
​C. The banks had agreed... loans would be secured by the completed project. This was true from the very beginning. It's a constant factor, so it cannot explain the change in their decision. In fact, this would be a reason to keep lending, as their only hope of getting any collateral (the "completed project") is to see it finished.
​D. The cost overruns were largely due to unforeseeable problems... This explains why the project ran out of money, but it doesn't explain the banks' change of heart. This could have been true the first time, too ("Oh, an unforeseeable problem? Here is more money"). It doesn't explain why their patience has run out now.
​E. The project stimulated... new construction techniques... This is a nice side benefit for the construction industry, but it's completely irrelevant to the banks. The banks do not get paid in "new techniques"; they get paid in cash. This doesn't affect the project's profitability or their decision.

Financing for a large construction project was provided by a group of

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Financing for a large construction project was provided by a group of

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