Fourteen years ago, the U.S. Aluminum Corporation borrowed $6.5 million. Since then, cumulative inflation has been 98 percent (a compound rate of approximately 65 percent per year).
a. When the firm repays the original $6.5 million loan this year, what will be the effective purchasing power of the $6.5 million? (Hint: Divide the loan amount by one plus cumulative inflation.)
b. To maintain the original $6.5 million purchasing power, how much should the lender be repaid? (Hint: Multiply the loan amount by one plus cumulative inflation.)
c. If the lender knows he will receive $6.5 million in payment after 14 years, how might he be compensated for the loss in purchasing power? A descriptive answer is acceptable.
