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Principles of Finance Videos 156 videos

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Principles of Finance: Unit 7, The Math of a High-End Coffee Maker 3 Views


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Description:

Hope you’re caffeinated, because we’re about to take a look at the math of a high-end coffee maker.

Language:
English Language

Transcript

00:00

principles of finance a la shmoop the math of a high-end coffee maker

00:06

all right well breville x' marketing department bugged us about doing this [picture of coffee maker]

00:10

video lots of whiners whine about the cost of cappuccino at starbucks it's

00:14

about seven bucks or have meant a lot to these days and then give or take well if [card machine]

00:18

you bought the fancy $2,000 Breville home machine well how many ventis do you

00:24

need to break even that is the real question

00:27

forget the to be or not to be crap alright well simple math would have you [writing on white board]

00:31

just divide the two thousand dollars by seven bucks and well you'd get two

00:34

hundred eighty six cups but that would be a special kind of math what's called

00:39

oh yeah wrong math because you do have costs

00:42

when you make coffee at home well a bag of equivalent quality beans cost you [clip board in kitchen]

00:46

fifteen bucks that's 15 to the consumer not buying it in eight hundred-pound

00:50

truckloads the weight Starbucks does then there's electricity cost and the [truck backs up and dumps coffee on ground]

00:54

cost of washing a cup and the cost of those little wafer cleaning thingies you

00:58

have to put in the machine every few hundred cups and so on well all totaled

01:02

it costs you about two bucks a cup to make them at home ignoring the notional

01:06

value of being able to drink that cup outside of your home and just assuming

01:10

it equals the convenience of being able to drink your cup inside of your home [woman drinks coffee in kitchen]

01:14

and and not having to wait in line as the guy who takes your money he looks at

01:17

you angrily for interrupting against a facebook updating and that also argues

01:22

that the taste of both cups is the same it probably is so let's say it's a $5 [woman drinks coffee in a house at christmas]

01:26

per cup difference when you make it on your Breville machine at home and if it [writing on white board]

01:30

costs you 2 grand while new math here then when you produce 400 cups on your

01:35

own then you've equalled the cost of the Breville but yeah that analysis is

01:39

missing a number of things as well well the better analysis first asks how many

01:43

ventes you drink a week so let's say you drink two a week or about a hundred a

01:48

year because well you like making problems like this convenient for the

01:52

writer at a hundred ventes a year at seven bucks each you're spending a $700

01:56

on ventes a year and it takes you about three years to quote make back unquote

02:01

the two grand that you spent on that Breville got that five bucks a cup in

02:05

savings to you times four hundred cops three years times a hundred cups a year

02:09

yeah but wait you have some costs associated

02:12

your breville double espresso half-caff venti latte making machine that you've [Breville machine in kitchen]

02:15

named Susie you forgot one big thing any guesses there is a time value of money

02:21

and if this is the first time you've heard that notion then see the cashier

02:25

at the front desk for some change to buy your own highly capped coffee and go

02:29

back and watch unit 1 all over again you could have taken your 2 grand and gone [man sits at computer with coffee]

02:33

to the track bet on Nessie runs fast and turned it into a hundred grand or more

02:38

likely a whole lot of nothing well risk-adjusted you could have put it in

02:42

the equity markets and made a give or take 10 percent a year compounded had

02:46

you chosen to bypass the kindly loving Aussies at Breville well you could have

02:51

turned your 2 grand Breville investment into something looking like it looked

02:56

like that 2 grand and then twenty two hundred year two and 20 for 20 or three

03:00

a 26 or something like that and here four five six something like that note a

03:03

few things here by year six on a 10% return ignoring taxes and we shouldn't

03:08

but we are for this illustration we're generating in capital appreciation over

03:12

three hundred bucks a year that buys a lot of latte well divide that $300 by

03:17

seven dollars and you get forty three of your veinte cups almost one a week and

03:22

you still own your own capital so was it smart to buy that machine hmm

03:27

rethinking things here so yeah our whole purpose in painting this picture with [coffee beans raining down]

03:32

coffee is to demonstrate that you can't neglect to keep in mind that time value [coffee getting poured into cup]

03:36

of money I eat you can't adequately assess the quality of an investment

03:40

without also asking yourself what are the hidden costs and what else could you

03:45

be doing with that money all right sum up the marginal coffee [hand looking into jars]

03:48

cost at Starbucks seven bucks marginal coffee cost at home two dollars plus the

03:52

capital cost the freedom to grind your own beans fine you know priceless

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