Question

Twelve years ago, the Archer Corporation borrowed $6,850,000. Since then, cumulative inflation has been 80 percent (a compound rate of approximately 5 percent per year). a. When the firm repays the original $6,850,000 loan this year, what will be the effective purchasing power of the $6,850,000? (Hint: Divide the loan amount by one plus cumulative inflation.) (Do not round intermediate calculations and round your answer to the nearest whole dollar.) Effective purchasing power b. To maintain the original $6,850,000 purchasing power, how much should the lender be repaid? (Hint: Multiply the loan amount by one plus cumulative inflation.) (Do not round intermediate calculations and round your answer to the nearest whole dollar.) Loan repayment

Answer 1

a.Effective Purchasing power = Loan Amount/(1+Cumulative Inflation)

= 6,850,000/(1+80%)

= $3,805,555.56

i.e. $3,805,556

b.Loan Repayment = Loan Amount*(1+Cumulative inflation)

= 6,850,000*1(1+80%)

= $12,330,000