Some important follow-ups to yesterday’s column.

THE MORE YOU KNOW, THE LESS YOU EARN

Ed: ‘Also, given a constant amount of Work, as your Knowledge increases, your Money decreases. I believe this is called ‘graduate school.”

NO, IT’S 177%

Brian Holdren: ‘Wenyu has assumed that one case of wine will last for an entire year. Must be a magic case of wine! Anyway, Less is correct (as you assumed). Doing the calculation with Excel: 177.4579488% Internal Rate of Return.’

☞ I always assume Less is correct, but let humor get the better of me – I liked the headline.

Ken Shirriff: ‘My final answer is 177.46%. This is based on the assumption that you receive $10 each week to spend and if you have a credit line with an APR of $177.46%, you’ll break even buying bottles vs. charging the case. Happily, this answer matches Less’s, although it took me several tries to get all the details right, and I got values from 63% to 299% while working on this.’

Mike Lyons: ‘To do the calculation properly we need to focus on the cash flows, not on the mythical $1/week that you earn. Switching to the ‘cheaper by the case’ method and looking at the changes in our cash flow over a 12-week period, we see:

Week 1: -$98 (we spend $108 instead of $10)
Weeks 2-12: +$10 (we spend $0 instead of $10)

‘Excel’s IRR (Internal Rate of Return) function tells us that is a return of 1.9764% per week. To turn that into an annual return, we can use a formula for compounding returns:

((1+r)^p)-1, where r is the rate per period and p is the number of periods, so we get ((1+.019764)^52)-1) = 176.7%.’

Bob Fyfe: ‘Instead of drinking a bottle once a week, drink one every night. Save $365 per year instead of only $52. Further, you mention saving even more money by switching to an $8 bottle. In actuality, you should be buying $20 bottles and drinking one every night. Since you earn such a high rate of return, you might as well “invest” as much as possible.’

George F (who I thought at first was kidding): ‘You are making the following assumptions:

  1. That you are able to provide the same or better quality storage of a case of wine as the store at the same or better price.
  2. That you do not break all the bottles in the case during transportation and storage.
  3. That you will not be tempted to drink more wine if you bought a case than if you bought individual bottles. Additionally drinking a case of wine could lead to a decline in your judgment, personal reputation, and balance, all of which could lead to grave additional costs.
  4. That the wine you are buying does not deteriorate during the 12 weeks of storage.
  5. That you will like the wine as much at the beginning of a 12 week cycle as the end.
  6. That the option to choose a different bottle of wine each week or no bottle at all (and spend the $10 on some other beverage) is of no value.
  7. That you experience no costs and inconveniences in transporting a case as opposed to individual bottles.

‘Assumptions 1-4 can result in actual cash losses. Assumptions 5-7 result in loses of value but not actual money. There is a saying ‘penny wise and pound foolish.’ Even Amy Dacyczczyn, author of The Tightwad Gazette II has a fairly negative view (page 97) of warehouse clubs and buying in bulk. She suggests a fairly detailed of costs and benefits to determine the true benefit of buying in bulk.

‘I put together a present value analysis of 119 weeks of buying cases (once every 12 weeks for $108 a case) vs. individual bottles (once a week for $10 a week). Assuming an interest rate of 5% on cash (and that I did everything right) you would need starting capital of $1,135.44 to buy 1 bottle of wine a week for 119 weeks. You would need $1027.18 if you bought cases instead. The savings is about $108 or 1 case. I personally do not feel that $108 is adequate compensation for the costs and risks. I can email the excel spread sheet if you like.’

☞ Ah, but you don’t need a starting capital of $1,027.18 to change from buying a bottle a week to buying a case every 12 weeks – you need $98. (Instead of spending $10 that first week for one bottle, you spend $108 for 12 bottles, which means you have to come up with $98 more. That’s the most capital you will ever need in order to save what would be $119 on wine over 119 weeks.

As to your other points, they are more or less valid and I appreciate your raising them. But don’t forget some counter-balancing points: Shopping in bulk means fewer trips to the store (saves time and transportation; less chance of getting killed in a car crash) . . . means you are less likely ever to run out at an awkward time (have to make a Sunday morning run for bathroom tissue, which is never on sale at the QuickyMart, just moments before little Timmy takes his first precious steps and you’re not there to see or videotape it) . . . and means you will be better prepared for a possible interruption in the supply chain, should there be a hurricane, flood, earthquake or red alert (and won’t you wish you had a case of wine then!)

 

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