Why buy fertilizer 6 months in advance?
$5,000 of fertilizer X .(06/2) =
$150 of interest lost
add to that the $5,000 expenditure, and that fertilizer actually cost
$5,150 to acquire
The example above assumes a 6% annual interest rate. We divide by 2 in the equation above because six months is half of a year. If we buy fertilizer six months in advance, in this example we are giving up the opportunity to earn $150 of interest. So, if we buy fertilizer six months in advance, it actually cost us $5,150 to acquire.