Autie Frannie wants to help pay for her twin nephews to attend a private school.
ID: 1181670 • Letter: A
Question
Autie Frannie wants to help pay for her twin nephews to attend a private school. She intends to send a cheque for $2,000 at the end of each of the next eight years to apply to the cost of schooling.
a) If general price inflation, as well as tuition price inflation, is expected to average 5% per year for those eight years, calculate the present worth of the gifts. Assume that the real interest rate will be 3% per year.
b) If Autie Frannie wants her figts 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%.
Autie Frannie wants to help pay for her twin nephews to attend a private school. She intends to send a cheque for $2,000 at the end of each of the next eight years to apply to the cost of schooling. If general price inflation, as well as tuition price inflation, is expected to average 5% per year for those eight years, calculate the present worth of the gifts. Assume that the real interest rate will be 3% per year. If Autie Frannie wants her figts 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%.Explanation / Answer
a) Interest rate = 3%+5%=8%
present worth of the gifts = 2000/1.08 + 2000/1.08^2 + 2000/1.08^3 + 2000/1.08^4 + 2000/1.08^5 + 2000/1.08^6 + 2000/1.08^7 + 2000/1.08^8=$11,493.28
b)present worth of her gifts =2000/1.03 + 2000/1.03^2 + 2000/1.03^3 + 2000/1.03^4 + 2000/1.03^5 + 2000/1.03^6 + 2000/1.03^7 + 2000/1.03^8=$14,039.38
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