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Fourteen years ago, the U.S. Aluminum Corporation borrowed $9.9 million. Since then, cumulative inflation has been 98 percent (a compound rate of approximately 5 percent per year).
a. When the firm repays the original $9.9 million loan this year, what will be the effective purchasing power of the $9.9 million? (Hint: Divide the loan amount by one plus cumulative inflation).
b. To maintain the original $9.9 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 only $9.9 million in payment after 14 years, how might he be compensated for the loss in purchasing power? A decriptive answer is acceptable.
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