Rajan has just won the national lottery. His award can be taken either in the form of Rs.40,000 at the end of each of the next 25 years or as a single payment of Rs.500,000 paid immediately.

a. If he expects to be able to earn 5 percent annually on investments over the next 25 years (i.e. 5 percent is the appropriate discount rate), which alternative should he select?

b. Would his decision in part (a) be altered if he could earn 7 percent rather than 5 percent on the investments over the next 25 years?