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What I wanna do in this video is kinda give a back-of-the-envelope way
for thinking about a conundrum that the Khan academy is facing right now
and you could do a little bit more of a precise way with present valuing and all that
but this will give you a pretty good sense of how to make these decisions
so we're seriously looking at office space
I've changed these numbers to simplify things a little bit
but there's a nice office, and it's going for 2 thousand dollars per month
and then there's this dingy office
it's really too dingy to convert it into a night club
and it's really too dingy to be a respectable place to work
but it's going for 1000 dollars a month
and I talked to a contractor
and once again I'm simplifying these numbers
these numbers aren't the exact numbers
but it makes the math a little bit simpler
the contractor says it would cost us about ten thousand dollars
to get this dingy office to the condition of the nice office
and in either situation we are thinking about a 24 month lease
so 2 year lease
24 month lease
and the contractor said it would take 1 month of work
to get the dingy office space up to speed
so the nice office space landlord says
look, it'll be 24 month lease, you can just occupy it, it's ready to go
the dingy office space, I talked him about this idea of us investing money and repairing it
he's like, ok, if you need to repair it
you know, is not the easiest person to deal with
he says I'm going to charge you an extra month of rent
so even while I'm repairing it I have to pay rent
so then he'll say I'm willing to do a 25 month contract
a 25 month lease with you
so 25 months
so you could still, once you repair it
you still get 2 years of service from the dingy office
so which one should I do?
and I'll tell you, my emotions, I want to do the nice one
because I don't want to spend ten thousand dollars
and make this all nice
and then 2 years later the landlord could raise the rent
but let's just think about it rationally
which one makes sense?
and the easiest way to think about that is
what is the effective amount of rent
in a very back-of-the-envelope way
that we're paying for the dingy office?
so if you think about it over the course of the 24 months
that we're going to
well, if you think about it over the entire lease
we're gonna have 25 months, we're going to pay a thousand dollars per month
so it's gonna be 25 thousand dollars
plus 10 thousand dollars to repair it
so, plus 10 thousand dollars
I should write 10k like a did before
plus 10k
and in terms of the useful life
because over here when we say per month
every month here is useful
so how many useful months are here?
so we're gonna spend 1 month to repair
we only get 24 useful months
so we only get 24 useful months
so if you view it this way
I'm not doing any fancy present valuing
just back-of-the-envelope
it is 35 thousand dollars over 24 months
so let's get our calculator out
I guess it's not pure back-of-the-envelope
but pretty close to pure back-of-the-envelope
35 thousand divided by 24 is equal to 1458
so this is equal to approximately 1458 dollars per month
so even though I don't wanna invest in this property
and I'm only going to be able to use it 2 years
and this person is gonna be able to raise the rent after that
it actually still makes a lot of sense
it still makes - actually almost 500 dollars a month of sense
or more than 500 dollars a month of sense
in this back-of-the-envelope way
to get the dingy office
and repair it