I30-60

Question

The investment team is evaluating several opportunities across six cities. The team leader has established the following financial criteria to guide investment decisions:
 
• Profit (defined as 5-year returns minus investment cost) must be at least $100 million
 
• The ratio of 5-year returns to investment cost must be at least 2
 
• The 5-year IRR (Internal Rate of Return) must be at least 20%The table below shows the investment data for six cities. All dollar amounts ($) are in millions.
      City   Investment Cost   5-Year Returns   10-Year Returns   IRR (5 Year)       A   $500   $600   $1300   10%       B   $700   $900   $1200   18%       C   $120   $600   $1000   30%       D   $400   $850   $2000   20%       E   $450   $500   $1500   5%       F   $50   $450   $600   45%The legal team has reviewed the potential risks associated with investing in each city. Their findings are summarized below:
 
• City A: New tax laws and strict environmental regulations are expected to reduce profitability and cause project delays. Investment is not recommended.
 
• City B: Ongoing political instability creates risks of disruption and asset damage. Investment is not recommended.
 
• City C: No risks identified.
 
• City D: A moratorium on large-scale developments is in place, risking indefinite project delays or cancellations. Investment is not recommended.
 
• City E: A history of expropriating foreign assets presents high risks to investment security. Investment is not recommended.
 
• City F: No risks identified.

Bunuel · Answer

Official Solution:

The legal team evaluates risks that may affect both project feasibility and investment security. 
 
• Tab 3 shows that the legal team considers risks affecting project feasibility (for example, City A has environmental regulations causing delays; City D has a moratorium preventing large-scale developments) and risks affecting investment security (for example, City B has political instability; City E has a history of expropriating foreign assets). Answer: Yes
 
 Risk of significant project delays may deem an investment not feasible.  
 
• Tab 3 shows that the legal team does not recommend investing in cities with risk of significant project delays (for example, City A has environmental regulations causing delays; City D has a moratorium that may prevent project completion). Answer: Yes
 
 The legal team only considers current political and economic conditions when assessing investment risk. 
 
• Tab 3 shows that the legal team considers not only current political and economic conditions but also other risks (for example, City A is affected by environmental regulations; City E is excluded due to a history of expropriating foreign assets). Answer: No

Correct answer:

The legal team evaluates risks that may affect both project feasibility and investment security.  "Yes"

Risk of significant project delays may deem an investment not feasible.  "Yes"

The legal team only considers current political and economic conditions when assessing investment risk.  "No"

I30-60

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My Rewards

City	Investment Cost	5-Year Returns	10-Year Returns	IRR (5 Year)
A	$500	$600	$1300	10%
B	$700	$900	$1200	18%
C	$120	$600	$1000	30%
D	$400	$850	$2000	20%
E	$450	$500	$1500	5%
F	$50	$450	$600	45%