Twenty years ago, the Archer Corporation borrowed $6,750,000. Since then, cumula

Question

Twenty years ago, the Archer Corporation borrowed $6,750,000. Since then, cumulative inflation has been 81 percent (a compound rate of approximately 3 percent per year).

a. When the firm repays the original $6,750,000 loan this year, what will be the effective purchasing power of the $6,750,000? (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 $6,750,000 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 / Answer

a. Effective purchasing power = Loan amount / (1 + Cumulative inflation)

= $6,750,000 / 1.81

= $3,729,282

b. Loan repayment = Loan amount × (1 + Cumulative inflation)

= $6,750,000 × 1.81

= $12,217,500

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