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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  [#permalink]

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New post Updated on: 05 Nov 2018, 10:30
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  25% (medium)

Question Stats:

77% (01:25) correct 23% (01:23) wrong based on 159 sessions

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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.

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Difficulty Level: 600

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Originally posted by SajjadAhmad on 25 Oct 2018, 05:11.
Last edited by SajjadAhmad on 05 Nov 2018, 10:30, edited 1 time in total.
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Re: Financing for a large construction project was provided by a group of  [#permalink]

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New post 25 Oct 2018, 05:54
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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!
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Re: Financing for a large construction project was provided by a group of  [#permalink]

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New post 25 Oct 2018, 06:53
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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


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Re: Financing for a large construction project was provided by a group of  [#permalink]

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New post 25 Oct 2018, 07:08
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+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)
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Re: Financing for a large construction project was provided by a group of  [#permalink]

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New post 25 Oct 2018, 07:19
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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Re: Financing for a large construction project was provided by a group of  [#permalink]

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New post 25 Oct 2018, 10:13
DavidTutorexamPAL wrote:
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!


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.

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Re: Financing for a large construction project was provided by a group of  [#permalink]

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New post 25 Oct 2018, 11:42
DavidTutorexamPAL wrote:
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!





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.
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Re: Financing for a large construction project was provided by a group of  [#permalink]

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New post 25 Oct 2018, 14:47
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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Re: Financing for a large construction project was provided by a group of  [#permalink]

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New post 31 Oct 2018, 22:01
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.
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Re: Financing for a large construction project was provided by a group of &nbs [#permalink] 31 Oct 2018, 22:01
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