The close-coupling approximation has been used to investigate positronium formation into the n=1 and n=2 levels and the excitation of lithium in positron-lithium collisions at impact energies up to 50 eV. The lithium atom is described within a single-electron approximation using a model potential. The authors have used a target basis set of the for Li(2S, 3S, 2p, 3p), and investigated the effect upon excitation and elastic scattering due to the coupling of positronium formation channels by adding the positronium states Ps(1s, 2s, 2p) to the expansion. The convergence of the cross sections was studied with respect to the addition of a Li(p) pseudostate. The sensitivity of the results to the choice of model potential was also examined.