Thirteen years ago, the Archer Corporation borrowed $6,950,000. Since then, cumu
ID: 2825404 • Letter: T
Question
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.)
Explanation / Answer
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.
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