1

money has a time value.

Submitted by Guest on November 5, 2007 - 20:59.

These calculations are not quite right; it is a money savings, but not 33%.
First, look at the problem this way:
If interest rates were zero, you could either spend (using year = 360 days for round numbers, as Phillip did above):
$9/day for 360 days, or $3240.
The same number of bottles as 30 cases with a 15% discount is $2754.

So at *most* you can save 15% with this strategy of buying the 360 days at once.
However, if you consider that money has value over time ($5 now is more valuable than $5 later, because you can profit off the interest in the meantime) you won't be able to hit that.

The correct way to do the present value calculation is (in Excel, assuming a 5% interest rate)
=PV(5%/360,360,9)
=$3160.12
What this means is that the cost to you *right now* of shelling out $9/day for the next 360 days is only $3160.12, not $3240, because you can earn interest off of the money you haven't spent yet in the meantime. In other words: if you put $3160.12 in an account that earns about 5% annual interest compounded daily, you will be able to withdraw $9 a day for 360 days before the account is empty.
So the actual savings by buying all the bottles now? (3160.12-2754)/3160.12 = 12.85%.

I'ts still not a bad savings, as long as the storage of the wine (and the effort to haul home 30 cases) is worth the hassle to you. But it's not going to save you 33%.

A second way to look at it-
As said above, I can cover $9/day for the next 360 days by spending $3160.12 today (with 5% interest). If it's possible to save 33%, there must be some way to buy (or arrange to buy) 360 bottles of wine today for ($3160.12*(100%-33%)) or $2085.68.

Now for the question: will it *earn* you 33%?
No. For this to be true, I would have to spend $2754 at the beginning of the year, and end up with $3662 (133% of $2754) at the end of the year. Even if I drank no wine, and re-sold every bottle at retail, this would get me only $3240. Once you throw in the cost of selling the wine, you'd probably have little to no profit, getting you a very small return if anything.

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