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).

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

$

 
Explanation:

a.

Effective purchasing power	= Loan amount / (1 + Cumulative inflation)
	= $6,850,000 / 1.80
	= $3,805,556

b.

Loan repayment	=	Loan amount × (1 + Cumulative inflation)
	=	$6,850,000 × 1.80
	=	$12,330,000