Question

Part B: Using only the Excel functions, please solve the following questions: 2. [Interest Rates]: Well-known financial writer Andrew Tobias argues that he can earn 200% per year buying wine by the case. Specifically, he assumes that he will consume one $10 bottle of fine Bordeaux per week for the next 12 weeks. He can either pay $10 per week or buy a case of 12 bottles today. If he buys the case, he receives a 10 percent discount and, by doing so, earns the 177 percent. Assume he buys the wine and consumes the first bottle today. Do you agree with his analysis? Do you see a problem with his numbers?

Answer 1

By buying by case, you can get a discount of 10%, so for 12 bottles of wine ($10 each), you'll have to pay $108, instead of $120.

This is the PV of an annuity with $10 periodic payments, 12 periods and an unknown r. So:

$108 = 10/r * (1- (1/1+r)^12))

By solving the above equation, r is calculated as 1.98% and it's per week.

So the APR is: 0.0198 * 52 = 102.77%

And then EAR can be calculated as (1+APR/52)^52 - 1 = 176.68% = 177 % Approximately Yes, I agree with the analysis. However, if we buy by case, we will pay less cash in total, but our payments will be much bigger ($108 vs $10). So, if we are to include the time-value concept in our calculations, why would we ignore the fact that by buying buy case, our cash outflows will be much larger than if we were to by bottle by bottle