Question

In: Finance

A well-known financial writer argues that he can earn an extremely high return buying wine by...

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?

Expert Solution

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%

jeff jeffy answered 2 years ago

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