Day 2 – The Calibrated Slot Machine
Step 1: Let’s revisit our potential profit equation
Potential Profit = [# months rented x monthly rent] – fixed expenses – repair costs
Step 2: Now I’d like to introduce you to a machine that picks numbers between a certain range. We’ll call it a calibrated slot machine and show it as r(min, max).
If we want it to pick numbers between 5 and 10, we would write it as r(5, 10). And if we pull the machine’s handle three times, it might issue numbers like “6”, “5”, and “9.” These numbers, of course, are between the smallest and largest assigned values.
Step 3: Here is where I make you cheat. We’re actually supposed to consider the data’s distribution, but we’re going to ignore that step.
Instead, I want you to just pick reasonable ranges for the “# months rented” per year and “repair costs.” For our example, we’ll say that during the year, the house will be rented between 8 and 12 months and write this as r(8, 12). And we’ll say the repair costs will realistically range between $220 and $800 per year and write it as r(220, 800).
Step 4: Now when we rewrite our equation using the slot machine shorthand, it looks like this:
Potential Profit = [r(8, 12) x monthly rent] – fixed expenses – r(220, 800)
The main point: You can be more confident of your results when you use ranges to define your variables.
In tomorrow’s lesson I will show you how to put this equation into a spreadsheet and compute 1,000 possible estimates of the profit.