To choose the best alternative among the 3 options given, we need to find the present value of the cash

inflows first.

Required rate of return = 8%

Option i)

Annuity (A) = Rs. 14,000

Lumpsum at the beginning of the period = Rs. 80,000

Time period (n) = 10 Years

Present value of annuity = A*((((1+r)^n)-1)/(r*(1+r)^n))

=14000*((((1+0.08)^10)-1)/(0.08*(1+0.08)^10))

= Rs. 93,941.14

Profit = Rs. 13,941.14

Option ii)

Annuity (A) = Rs. 14,000

Lumpsum at the beginning of the period = Rs. 1,50,000

Time period (n) = 20 Years

Present value of annuity = A*((((1+r)^n)-1)/(r*(1+r)^n))

=14000*((((1+0.08)^20)-1)/(0.08*(1+0.08)^20))
 = Rs. 1,37,454.06

Loss = Rs. 12,545.94

Option iii)

Annuity (A) = Rs. 14,000

Lumpsum at the beginning of the period = Rs. 1,20,000

Time period (n) = 15Years

Present value of annuity = A*((((1+r)^n)-1)/(r*(1+r)^n))

=14000*((((1+0.08)^15)-1)/(0.08*(1+0.08)^15))

= Rs. 1,19,832.70

Loss = Rs. 167.3

So, we can see that only option i has a present value of annuity greater that the lumpsum Ms. Punam is
paying at the beginning of the period and there is a profit of Rs. 13,941.14. In the rest of the options Ms.
Punam is incurring a loss. So, she should go for option i.