Question
In: Finance
Thirteen years ago, the Archer Corporation borrowed $6,950,000. Since then, cumulative inflation has been 47 percent...
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.)
Solutions
Expert 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. | |||||||||
jeff jeffy answered 2 years agoRelated Solutions
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