The investment team at a hotel franchise is evaluating several opportunities across six cities. The team leader has set the following criteria to guide the selection of the most promising investment: 1. Profit, defined as 5-year returns minus investment cost must be at least $100m 2. Ratio of 5-year returns to total investment must be greater than or equal to 2 3. The 5-year IRR (Internal Rate of Return) for the investment must be greater than or equal to 20%A junior analyst on the team prepares the following comparative to assist making the investment decision (m= million): https://i.ibb.co/z6wjxTT/investment-comparison.pngThe legal team has been investigating possible challenges across the countries in which potential investments could be made. They have drafted the following memo for the investment team: Dear Team, As you finalize investment decisions, please consider the following information to better inform your decisions: City A faces new tax laws and stringent environmental regulations, likely reducing profitability and delaying projects. This change is likely to erode profit margins considerably, making the return on investment less attractive. Additionally, there are stringent environmental regulations that could delay project timelines and increase costs. City D is under a moratorium on large-scale developments, risking indefinite delays or cancellations. City B is experiencing political instability, with disruptions and potential damage to assets. City E has a history of expropriating foreign assets, posing high risks to investment security. In both these cities, there is a significant risk of further escalation, which could result in operational interruptions, increased costs for security measures, and potential damage to assets. IMPROVED VERSION OF THIS QUESTION IS HERE: https://gmatclub.com/forum/the-investme ... 43768.html

couldn't understand why Q1 can be City C, D, F not City C, F since IRR of City D is 20%. According to requirement #3, IRR must be greater than 20%. 20% is not greater than 20%... right? or am I missing sth

I see the confusion here. City C, F isn't an option but I've edited it to make it clear.

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catinabox

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09 Sep 2024, 10:14

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Official Solutions:

Q1. Considering only the team leader’s financial criteria for investment, which of the following combinations of cities satisfy the investment requirements?

City A:
- Profit: $600m - $500m = $100m (meets criterion 1)
- Ratio: $600m ÷ $500m = 1.2 (does not meet criterion 2)
- IRR: 10% (does not meet criterion 3)
- Does not satisfy all criteria.

City B:
- Profit: $900m - $700m = $200m (meets criterion 1)
- Ratio: $900m ÷ $700m = 1.29 (does not meet criterion 2)
- IRR: 18% (does not meet criterion 3)
- Does not satisfy all criteria.

City C:
- Profit: $600m - $120m = $480m (meets criterion 1)
- Ratio: $600m ÷ $120m = 5 (meets criterion 2)
- IRR: 30% (meets criterion 3)
- Satisfies all criteria.

City D:
- Profit: $850m - $400m = $450m (meets criterion 1)
- Ratio: $850m ÷ $400m = 2.13 (meets criterion 2)
- IRR: 20% (meets criterion 3)
- Satisfies all criteria.

City E:
- Profit: $500m - $450m = $50m (does not meet criterion 1)
- Ratio: $500m ÷ $450m = 1.11 (does not meet criterion 2)
- IRR: 5% (does not meet criterion 3)
- Does not satisfy all criteria.

City F:
- Profit: $450m - $50m = $400m (meets criterion 1)
- Ratio: $450m ÷ $50m = 9 (meets criterion 2)
- IRR: 45% (meets criterion 3)
- Satisfies all criteria.

The cities that satisfy all the team leader’s financial criteria are City C, City D, and City F.

The correct answer is: City C, D, F.

Q2. Based on the legal team's memo to the investment team, select True/ False for each of the statements below.

City B is facing political unrest:
True - The memo states that City B is experiencing political instability.
City A has a history of expropriating foreign assets:
False - The memo mentions new tax laws and environmental regulations for City A, but expropriation of foreign assets is associated with City E, not City A.
City D is under a moratorium on large-scale developments:
True - The memo specifically states that City D is under a moratorium on large-scale developments.

Q3. Considering both the financial criteria and legal risks for investment, select True/ False for each statement below.

City C remains the only feasible investment:
False - City C is a viable investment, but City F is also feasible according to the financial and legal criteria.
Investments into City D are no longer feasible:
True - The legal memo mentions that City D is under a moratorium on large-scale developments, making it risky or potentially infeasible.
Both City C and City F remain viable options:
True - Both City C and City F meet the financial criteria and do not have significant legal risks mentioned in the memo.

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12 Dec 2024, 10:30

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1. Let's consider each city and check whether each of criteria match them.

- A: (1) - Profit = $600m - $500m = $100m $\geq$ $100m, which works; (2) - Ratio = $\frac{600}{500} = 1.2 < 2$, which doesn't work; (3) - IRR = 10% $<$ 20%, which doesn't work.
- B: (1) - Profit = $900m - $700m = $200m $\geq$ $100m, which works; (2) - Ratio = $\frac{900}{700} \approx 1.3 < 2$, which doesn't work; (3) - IRR = 18% $<$ 20%, which doesn't work.
- C: (1) - Profit = $600m - $120m = $480m $\geq$ $100m, which works; (2) - Ratio = $\frac{600}{120} = 5 \geq 2$, which works; (3) - IRR = 30% $\geq$ 20%, which works.
- D: (1) - Profit = $850m - $400m = $450m $\geq$ $100m, which works; (2) - Ratio = $\frac{850}{400} \approx 2.1 \geq 2$, which works; (3) - IRR = 20% $\geq$ 20%, which works.
- E: (1) - Profit = $500m - $450m = $50m $<$ $100m, which doesn't work; (2) - Ratio = $\frac{500}{450} \approx 1.1 < 2$, which doesn't work; (3) - IRR = 5% $<$ 20%, which doesn't work.
- F: (1) - Profit = $450m - $50m = $400m $\geq$ $100m, which works; (2) - Ratio = $\frac{450}{50} = 9 \geq 2$, which works; (3) - IRR = 45% $<$ 20%, which works.

So, cities C, D, and F work.

2. We have to check whether the following statements are true or false based on the legal team's memo.

- City B is facing political unrest. "City B is experiencing political instability, with disruptions and potential damage to assets." So, this is statement is true.
- City A has a history of expropriating foreign assets. Nothing in the text relates this to city A, instead it's for city E, "City E has a history of expropriating foreign assets, posing high risks to investment security." So, this statement is false.
- City D is under a moratorium on large-scale developments. "City D is under a moratorium on large-scale developments, risking indefinite delays or cancellations." So, this statement is true.

3. Now, we have to consider both sources to verify the statements. Note that the legal team's memo excludes A, B, D, and E, which leaves cities C and F as feasible.

- City C remains the only feasible investment. City F is also feasible. So, this statement is false.
- Investments into City D are no longer feasible. The legal team's memo excludes it. So, this statement is true.
- Both City C and City F remain viable options. City C and F are the only feasible options left. So, this statement is true.

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IMPROVED VERSION OF THIS QUESTION IS HERE: https://gmatclub.com/forum/the-investme ... 43768.html

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True	False
		City B is facing political unrest
		City A has a history of expropriating foreign assets
		City D is under a moratorium on large-scale developments