Question

A well-known financial writer argues that he can earn 209 percent per year buying wine by the case. Specifically, he assumes that he will consume one $13 bottle of fine Bordeaux per week for the next 12 weeks. He can either pay $13 per week or buy a case of 12 bottles today. If he buys the case, he receives a 11 percent discount and, by doing so, earns the 209 percent. Assume he buys the wine and consumes the first bottle today. Calculate the EAR.

Answer 1

Total cost of buying the wines today = (13*12)*(1-11%) = $138.84

So we have got the following: PV = $138.84; nper = 12; PMT = 13. Note that since the first bottle is consumed today it is in the form of annuity due.

Thus rate can be computed using the "RATE" function in excel. The syntax will be: RATE (12, 13, -138.4, 0, 1). This gives a rate of 2.19348063%.

We will now convert this weekly rate to annual rate. Annual rate = (1+2.19348063%)^52 - 1

= 2.090337694

This means 209.0338% (4 decimal place) or 209.03% (2 decimal place) or 209% (rounded off to nearset %)

Thus the financial writer is right in his analysis.