Twelve years ago, the Archer Corporation borrowed $6,200,000. Since then, cumulative inflation has been 80 percent (a compound rate of approximately 5 percent per year). a. When the firm repays the original $6,200,000 loan this year, what will be the effective purchasing power of the $6,200,000? (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 $6,200,000 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.)

Question

Meadows

Business

18 December, 14:21

Twelve years ago, the Archer Corporation borrowed $6,200,000. Since then, cumulative inflation has been 80 percent (a compound rate of approximately 5 percent per year). a. When the firm repays the original $6,200,000 loan this year, what will be the effective purchasing power of the $6,200,000? (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 $6,200,000 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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Answers (1)

Know the Answer?

Kamora Malone · Answer 1

(a) $3,444,444.44

(b) $11,160,000

Explanation:

(a) Effective purchasing power:

= Loan amount : (1 + cumulative inflation rate)

= $6,200,000 : (1 + 0.80)

= $6,200,000 : 1.80

= $3,444,444.44

Therefore, the effective purchasing power of the $6,200,000 is $3,444,444.

(b) Lender should be repaid:

= Loan amount * (1 + cumulative inflation rate)

= $6,200,000 * (1 + 0.80)

= $6,200,000 * 1.80

= $11,160,000