Explanation:

- Sunil earns Rs864 in compound interest over two years at a 16% annual rate.

- The formula for compound interest is A = P(1 + r/n)^(nt), where A is the amount, P is the principal, r is the rate, n is the number of times interest is compounded per year, and t is the time in years.

- Here, A is the final amount including interest, P is what we want to find, r is 16% or 0.16, n is 1 (compounded annually), and t is 2.

- We rearrange the formula: A = P(1 + 0.16)^2 and find A = P x 1.3456.

- The compound interest is A - P = 864, therefore 1.3456P - P = 864, solving gives 0.3456P = 864.

- P = 864 / 0.3456 = Rs2,500.

Option 1: Rs2,500

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