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

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

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

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

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

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need to break even that is the real question

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

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

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

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oh yeah wrong math because you do have costs

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

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

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

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

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

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

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

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

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

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

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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]

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

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

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

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

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

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

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

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

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

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

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yeah but wait you have some costs associated

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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