An engineering alumni of Jamia Millia Islamia wishes to donate to scholarship fund of the faculty of Engineering and Technology. The following three options are available: Plan 1 ₹15,00,000 now. Plan 2 ₹3,75,000 per year for 10 years beginning 1 year from now. Plan 3 ₹12,50,000 five years from now

Question

An engineering alumni of Jamia Millia Islamia wishes to donate to scholarship fund of the faculty of Engineering and Technology. The following three options are available:
Plan 1 ₹15,00,000 now.
Plan 2 ₹3,75,000 per year for 10 years beginning 1 year from now.
Plan 3 ₹12,50,000 five years from now and another ₹20,00,000 five years from now.
The Dean of the faculty wants to select the plan that maximizes the buying power of the rupees received. If the donation earns a real interest rate of [latex]10\%[/latex] per year and the inflation rate is expected to average [latex]5\%[/latex] per year, which plan should be accepted? Evaluate the plans by taking into account the inflation.

Accepted Answer

The inflation-adjusted interest rate if is calculated as:

[latex]i_{f}=0.10 + 0.05 + (0.10)(0.05) = 0.155[/latex]

[latex]\left(P.W.\right)_{Plan 1}=₹15,00,000[/latex]

[latex]\left(P.W.\right)_{Plan 2}=₹3,75,000\left(P/A,15.5\%,10\right)[/latex]

[latex]=₹3,75,000\left(4.926\right)[/latex]

[latex]\left(P.W.\right)_{Plan 2}=₹18,47,250[/latex]

[latex]\left(P.W.\right)_{Plan 3}=₹12,50,000\left(P/F,15.5\%,5\right)+₹20,00,000\left(P/F,15.5\%,5\right)[/latex]

[latex]=₹12,50,000\left(0.4867\right)+₹20,00,000\left(0.4867\right)[/latex]

[latex]\left(P.W.\right)_{Plan 3}=₹15,81,775[/latex]

Since [latex]\left(P.W.\right)_{Plan 2}[/latex] is the largest in today’s rupees, select Plan 2.

Question 10.1: An engineering alumni of Jamia Millia Islamia wishes to dona...

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