Question

A variety of robots were featured at the 2016 National Restaurant Show that could be used for a variety of tasks in restaurants. These robots are being introduced at the same time that we are experiencing an on-going debate in the U.S. about the merits of a national minimum wage of $15 per hour for every worker. A former McDonald’sUSA CEO, Ed Rensi, recently said that purchasing a $35,000 robotic arm would be cheaper than paying fast food workers $15 per hour for food preparation tasks like bagging French fries.

For this hypothetical example, let’s make the following assumptions:

a.	For the cost of the hourly workers, use a total wage rate of $18 per hour to reflect payroll taxes (payroll taxes can add 15% or more to the hourly wage rate.)
b.	Assume that freight and installation for the robot’s initial placement in a McDonald’s restaurant will be a one-time cost of $5,000.
c.	The robot will require periodic service. Assume an annual service contract is required that costs 10% of the original cost plus installation of the robot per year.
d.	Assume that the robot will replace 10 employee hours per day, 360 days per year (the robot will not, at least initially, be as versatile as a person and cannot fully eliminate all food prep workers at this point.)
e.	Electricity and supplies consumed by the robot will be assumed to be $1,500 per year.

What would the payback period be for a robotic arm used by McDonald's for food preparation?

Answer 1

Annual saving in labor cost due to Robot = 360*10*$18 = $64,800

Cost of electricity and supplies consumed by Robot = $1,500

Annual service cost = $35,000*10% + $5,000 (Installation) = $8,500

Net Annual cash inflows from installation of robot = $64,800 - $1,500 - $8,500 = $54,800

Initial investment in Robot = $35,000 + $5,000 (Freight and installation) = $40,000

Payback period = Initial investment / Annual cash inflows = $40,000 / $54,800 = 0.73 Years