Thirteen years ago the Archer Corporation borrowed 6950000 S

Thirteen years ago, the Archer Corporation borrowed $6,950,000. Since then, cumulative inflation has been 47 percent (a compound rate of approximately 3 percent per year).

a. When the firm repays the original $6,950,000 loan this year, what will be the effective purchasing power of the $6,950,000? (Hint: Divide the loan amount by one plus cumulative inflation.) (Do not round intermediate calculations and round your answer to the nearest whole dollar.)

b. To maintain the original $6,950,000 purchasing power, how much should the lender be repaid? (Hint: Multiply the loan amount by one plus cumulative inflation.)

Solution

Archer Corporation a. When the firm repays the original $6,950,000 loan this year, what will be the effective purchasing power of the $6,950,000? Loan amount = 6950000 = 4727891 1 + Cumulative inflation 1.47 b. To maintain the original $6,950,000 purchasing power, how much should the lender be repaid? $6,950,000 × 1.47 = $10,216,500 A $10,216,500 loan repayment in a 47% cumulative inflationary environment will provide $6,950,000 in purchasing power to the original lender.