Seventeen years ago, the Archer Corporation borrowed $6,500,000. Since then, cumulative inflation has been 65 percent (a compound rate of approximately 3 percent per year).
a. When the firm repays the original $6,500,000 loan this year, what will be the effective purchasing power of the $6,500,000? (Hint: Divide the loan amount by one plus cumulative inflation.)
b. To maintain the original $6,500,000 purchasing power, how much should the lender be repaid? (Hint: Multiply the loan amount by one plus cumulative inflation.)