A couple wants to save for their daughter’s college expense. The daughter will enter college eight years from now, and she will need $40,000, $41,000, $42,000, and $43,000 in actual dollars for four school years. Assume that these college payments will be made at the beginning of each school year. The future general inflation rate is estimated to be 6% per year, and the annual inflation‐free interest rate is 5%.
(a) What is the market interest rate to use in the analysis?
(b) What is the equal amount, in actual dollars, the couple must save each year until their daughter goes to college?