In: Finance
A well-known financial writer argues that he can earn an
extremely high return buying wine by the case. Specifically, he
assumes that he will consume one $14 bottle of fine Bordeaux per
week for the next 12 weeks. He can either pay $14 per week or buy a
case of 12 bottles today. If he buys the case, he receives a
discount of 7 percent. Assume he buys the wine and consumes the
first bottle today.
What is the EAR of purchasing wine by the case with this
discount?
Answer : Calculation of EAR :
Calculation Cost of Purchasing Case = (12 bottles * $14) * (1 - 0.07)
= 156.24
Now taking this as present value we will calculate Rate using Rate function of Excel :
=RATE(nper,pmt,pv,fv,type)
where nper is the nuber of periods i.e 12
pmt is the periodic payment i.e 14
pv is calculated above i.e -156.24
fv is the future value i.e 0
type is 1 as he buys the wine and consumes the first bottle today.
=RATE(12,14,-156.24,0,1)
Rate will be 1.3479% or 0.013479
EAR = (1 + Rate)^52 - 1
= (1 + 0.013479)^52 - 1
= 2.006153249 - 1
= 1.006153249 or 100.62%