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Current time:0:00Total duration:3:48

Video transcript

what I want to do over in this video is kind of give a 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 of that but this will give you a pretty good sense of how to make this decision 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 forward $2,000 per month and then there's this dingy office it's really too dingy it's a converted nightclub and it's really too dingy to be a respectable place to work but it's going for $1,000 a month and I talked to a contractor and the contractor once again I'm simplifying these numbers these numbers aren't the exact numbers but makes the math a little bit simpler the contractor says it would cost us about $10,000 to get this dingy office to the condition of the nice office and in either situation we are thinking about a 24 24 month lease so two year lease 24 month lease and the contractor said it would take one month it would take one month of work to get the dingy office space up to speed so when I talked so the nice office space land landlord he says look it'll be 25 four month lease you could just occupy it it's ready to go the dingy office space I talked to him about this idea of us investing money and repairing it he's like okay if you need to repair it I'm you know he's kind of you know 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 the 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 two years of surface from service from the dingy office so which one should I do and I'll tell you my my emotions I want to do the nice one because I don't want to spend $10,000 and make this all nice and then two 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 on 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 that we're going to oil if you think about it over the entire lease we're going to have 25 months we're going to pay a thousand dollars per month so it's going to be twenty five thousand dollars plus ten thousand dollars to repair it so plus ten thousand dollars I'm just right 10k like I did before plus ten K and in terms of the useful life because over here when we're saying per month every month here is useful so how many useful months are here well we're going to spend one month to repair it we only get 24 useful months so we only get 24 useful months so the per so if you view it this way not doing any fancy present valuing just back of the envelope it is $35,000 $35,000 over 24 over 24 months and so let's get our calculator out I guess it's not pure back of the envelope but pretty clear clearly pretty close to pure back of the envelope 35,000 divided by 24 is equal to 14 58 so this is equal to approximately one thousand four hundred and fifty eight dollars per month so even though I don't want to invest in this property and I'm only going to be able to use it two years and this person is going to be able to raise the rent after that it actually still makes a lot of sense it still makes actually almost $500 a month of cents or more than $500 a month of cents and this kind of back of the envelope way to get the dingy office and repair it