Understanding Present Value and Payment Options

The video tutorial explores three payment options, comparing their present values using a 5% risk-free rate. It discusses the concept of present value, the impact of discount rates, and the safety of government-backed investments. The tutorial concludes by determining the best payment option based on present value calculations.

Which of the following is the first payment option discussed in the video?

• $100 today

• $50 today and $60 in 1 year

• $20 today, $50 in 1 year, and $35 in 3 years

• $110 in 1 year

What is the second payment option offered in the video?

• $20 today, $50 in 1 year, and $35 in 3 years

• $50 today and $60 in 1 year

• $110 in 2 years

• $100 today

How does the video describe the risk associated with the payments?

• Risk-free, similar to the federal government

• Very high risk, like cryptocurrency

• Moderate risk, like corporate bonds

• High risk, similar to stock investments

What is the assumed risk-free rate used in the video for present value calculations?

• 4%

• 6%

• 5%

• 3%

If you invest $100 at a 5% risk-free rate, what will it be worth in 1 year?

• $100

• $110

• $105

• $115

What is the present value of $110 received in 2 years at a 5% discount rate?

• $100

• $105

• $110.25

• $99.77

How is the present value of future payments calculated?

• By dividing by 1 plus the discount rate raised to the power of the number of years

• By adding the discount rate

• By multiplying by the discount rate

• By subtracting the discount rate

What is the present value of the $20 payment today?

• $20

• $19

• $21

• $18

What is the present value of the $50 payment in 1 year at a 5% discount rate?

• $52.50

• $50

• $45

• $47.62

Which payment option has the highest present value according to the video?

• Option 1: $100 today

• All options have the same present value

• Option 3: $20 today, $50 in 1 year, $35 in 3 years

• Option 2: $110 in 2 years