Auntie Frannie wants to provide tuition for her twin nephews to attend a private school. She intends to send a check for $5000 at the end of each of the next 8 years.
(a) If general price inflation, as well as tuition price inflation, is expected to average 5% per year for those 8 years, calculate the present worth of the gifts. Assume that the real interest rate will be 3% per year.
(b) If Auntie Frannie wants her gifts to keep pace with inflation, what would be the present worth of her gifts? Again assume inflation is 5% and the real interest rate is 3%.