Fourteen years ago, U.S. Aluminum Corporation borrowed $9.9 million. Since then, cumulative increase has been 98 percent (compound rate of just about 5 percent per year).
a. When the firm repays original $9.9 million loan this year, what will be effective purchasing power of $9.9 million?
(Hint: Divide the loan amount by one plus cumulative inflation.)
b. To sustain the original $9.9 million purchasing power, how much must the lender be repaid?
(Hint: Multiply the loan amount by 1 plus cumulative inflation.)
c. If the lender knows he will get $9.9 million in payment after 14 years, how may he be compensated for the loss in purchasing power? A descriptive answer is adequate.