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).
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| 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.)
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| 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.)
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| 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 |
