At Applebee’s, Presto tablets by E la Carte are being installed at every table.

Question

At Applebee’s, Presto tablets by E la Carte are being installed at every table. In total, Applebee’s will be purchasing 100,000 tablets. Customers will be able to pay their food bill and order appetizers and desserts using the tablets. The tablets are not replacing wait staff; wait staff will still take the orders for entrees. Applebee’s does not expect to reduce the work hours of its wait staff due to the tablet installation. By allowing customers to pay whenever they want using the tablets, it is expected that customers will be more satisfied, both with the ease and speed of payment. Diners are expected to get out the door faster with the new tablet payment method.

The tablets will also function as jukeboxes at individual tables since customers can select and pay for music tableside. In addition, customers will be able to play games on the tablets for a small fee. The music and game sales revenue will be split between Applebee’s and E la Carte.

In addition to the initial purchase price of the tablet hardware, Applebee’s will be paying E la Carte a subscription fee for the use and upkeep of the tablets.

Data and assumptionsUse the following assumptions for data for this exercise (all figures are assumptions only):

1. Each tablet has an initial purchase price of $250

2. The annual subscription fee per tablet is $50

3. Average revenue generated per day by each tablet is $1

4. Average number of days each tablet is in use each year is 360 days

5. Additional annual IT costs incurred for tablet integration into Applebee’s system is $225,000

6. The useful life of the tablets is four years. Ignore depreciation and taxes.

Questions:

1. Calculate the NPV of the investment in the tablets using a discount rate of 6%.

2. Now calculate the NPV of the investment in the tablets using a discount rate of 12%.

3. Does this investment in the tablets appear to be a financially sound investment for Applebee’s? Why or why not?

4. Recalculate the NPV of the investment now using an estimated useful life for the tablets of three years instead of four years. Assume a discount rate of 6%. What happens to the NPV compared to when the useful life was assumed to be four years? Does this investment still appear to be financially sound?

Explanation / Answer

1.NPV

present value of outflow (A) (250*100000) 25000000

cash inflow:

yearly inflow (1*360*100000) 36000000

yearly subscription (50*100000) (5000000)

integration cost (225000)

net cash inflow annual 30775000

@6% for 4 year pvfa 3.465

Pv of inflow (30775000*3.465) (B) 106635375

NPV (A-B) 81635375

2.

PVFA @12% for 4 year is 3.03

PV of inflow is 3.03*30775000 93248250

PV of outflow is 25000000

NPV 68248250

3.

it appears finacialy sound as the NPV of the tablet is positive.

4.

PV of outflow is 25000000

PV of inflow @6% for 3year will be

30775000*2.67 = 82169250

NPV 82169250-25000000 = 57169250

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