Today you make an investment of $ 500 that pays 10% per year

1) Current dollars at end of 20 years = Present value(1+r)^n

r = rate of interest = 10%

n = no of years = 20

Present value = $ 500

Thus Current dollars at end of 20 years =500(1+10%)^20

=500(1+0.1)^20

=500(1.1)^20

=500 x 6.7275

= 3363.75 $

2) Now we need to find real interest rate

Real interest rate = (1+nominal interest rate)/(1+inflation rate) - 1

= (1+10%)/(1+2.5%) - 1

= 1.1/1.025 - 1

= 1.07317 - 1

= 0.07317

i.e 7.32%

Now The purchasing power of what is in the account at the end of year 20, based on year 0 (real dollars) = Present value(1+r)^n

r = rate of interest = 7.32%

n = no of years = 20

Present value = $ 500

Thus 500(1+7.32%)^20

= 500 x (1.0732)^20

= 500 x 4.1078

= 2053.92 $