A financial writer argues that he can effectively earn 177 percent per year buyi

Question

A financial writer argues that he can effectively earn 177 percent per year buying wine by the case. Specifically, he assumes that he will consume one $100 bottle of fine Bordeaux per week for the next 12 weeks. He can either pay $100 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 for now that the price is expected to be constant, that he buys the wine and consumes the first bottle today, and that there are 52 weeks in a year.

a. Do you agree with his analysis? Why or why not?

b. Someone argues that the percentage return he earns is not real because he would consume all the wine. What could the financial writer do to realize the percentage return in terms of money?

c. Suppose starting from the next week, the price of the wine per bottle is expected to appreciate by 1% per week. Assume the writer can still enjoy the 10% discount for buying a case now. How much percentage return will he earn now?

Explanation / Answer

a. Do you agree with his analysis? Why or why not?

No because he is not considering the time value of money

The returns will be:

-12*100*0.9-(-100/(r/52)*(1-1/(1+r/52)^12)=0

=>r=86.287%

b. Someone argues that the percentage return he earns is not real because he would consume all the wine. What could the financial writer do to realize the percentage return in terms of money?

Sell the bottle and invest the money

c. Suppose starting from the next week, the price of the wine per bottle is expected to appreciate by 1% per week. Assume the writer can still enjoy the 10% discount for buying a case now. How much percentage return will he earn now?

-12*100*0.9-(-100/(r/52)*(1-(1.01/(1+r/52)^12))=0

=>r=130.742%

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