Question

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The IT consultant for the Happiness Hotel has requested a meeting with you and the owner. She was at a recent tech trade show for the hospitality industry and found out that there are upcoming changes for accepting credit cards at terminals. These new rules and laws were passed to prevent hacking of numbers over Internet transmission. During the meeting, she shows you two options: Option A: for $4,000 per payment terminal (you have three), she can reconfigure the Point of Sale programing and install a new chip credit card reader to prevent current fraud regulations. Based upon her professional opinion, this would last for about two years before you would have to make another investment of about the same amount to upgrade the protection. Your consultant feels that you would have to make this type of investment roughly every two years to remain compliant. Option B: You would remove your current Property Management system(PMS) and its terminals as well as the Cafe's Point of Sale (POS) terminal and replace the system. It would cost roughly $32,000 for the components, labor, and the technician programming. The new system would have a smaller footprint and would take up less space. It is also modular so when the new upgrades are required, you would only spend $2000 every 3−4 years. Your facilities people estimate that they would need to spend about $4000 to deal with electrical and other construction costs. There would also be a one time charge of about $1000 to train the current employees on the new system. You have decided to explore both options and you would like the following information from your newly hired controller including: A) what are some of the sunk costs associated with the two options? B) what would be some NON-cash factors involved in the decision. C) draw out the cash flows for the next ten years for both options. See M10 template for help. D) Assuming that the two options do not affect revenue or significantly change operating costs (other than the ones described above, calculate the payback period for the two options. E) Pick one choice and write a recommendation based upon the information in the mini case and from the previous weeks work.

Answer 1

**Sunk costs associated with the two options**

* Option A: The sunk costs associated with Option A are the $4,000 per terminal cost to reconfigure the Point of Sale programming and install a new chip credit card reader.

* Option B: The sunk costs associated with Option B are the $32,000 cost for the components, labor, and technician programming.

**Non-cash factors involved in the decision**

* The time and effort required to implement each option.

* The risk of system downtime during the implementation process.

* The potential impact on customer satisfaction.

* The potential impact on employee morale.

**Payback period for the two options**

The payback period for Option A is 2 years.

The payback period for Option B is 16 years.

**Recommendation**

Based on the information provided, I recommend Option B. The upfront cost of Option B is higher than Option A, but the long-term costs are lower. Option B also has the advantage of being modular, which means that it can be easily upgraded in the future.

In addition to the financial factors, I would also consider the non-cash factors when making my decision. Option B has the potential to improve customer satisfaction and employee morale. It is also less disruptive to the hotel's operations.

Ultimately, the decision of which option to choose is a complex one that should be made on a case-by-case basis. However, I believe that Option B is the best option for the Happiness Hotel.

**Recommendation letter**

Dear Mr. and Mrs. Happiness,

I am writing to you today to recommend that you choose Option B for upgrading your credit card processing system. Option B is the more expensive option upfront, but it has the lower long-term costs. It is also modular, which means that it can be easily upgraded in the future.

In addition to the financial factors, I believe that Option B has several non-cash advantages. It has the potential to improve customer satisfaction and employee morale. It is also less disruptive to the hotel's operations.

I understand that this is a complex decision, and I encourage you to carefully consider all of your options before making a decision. However, I believe that Option B is the best option for the Happiness Hotel.

Sincerely,

XYZ