Question

Q4) A student is awarded a scholarship and two options are placed before him (i) to receive Rs. 1.100 now or (ii) receive Rs. 100 p.m. at the end of each of next 12 months. Which option be chosen if the rate of interest is 12% p.a.? (PVIFA, 1%,12=11.255 )

Answer 1

To compare the two options, we need to find the present value of the second option using the Present Value of an Annuity formula. The present value of the second option is Rs. 1,125.50. Since the first option is to receive Rs. 1,100 now, which is greater than Rs. 1,125.50, the student should choose the first option.

Step-by-step explanation:

To compare the two options, we need to find the present value of the second option, which is receiving Rs. 100 per month for 12 months.

Using the Present Value of an Annuity formula, PV = PMT × PVIFA, we can calculate the present value.

Using the given PVIFA, 1%,12 = 11.255, we can calculate:

PV = 100 × 11.255 = Rs. 1,125.50

Therefore, the present value of the second option is Rs. 1,125.50.

Since the first option is to receive Rs. 1,100 now, which is greater than Rs. 1,125.50, the student should choose the first option to receive Rs. 1,100 now.