It could be $4000. It really could.
Agreed. Especially if the guests are offered to choose anything (market price lobster) off of the menu.
For 40 people, I hope that FIL looked into a package deal: private room, select menu with maybe 2 or three options, apps/salad/dessert chosen in advance. Kinda like a small scale wedding reception occasion.
Father in law called and said he wanted to do a dinner at a restaurant this year and would we help plan it. We said sure.
We tried to offer lower cost ways of doing it. We even offered our home and hosting supplying mains, sides and wine & beer
Gently asking -- did you try calling the restaurant and ask about package deals for a group of 40?
For some reason, I get the feeling that hosting at this particular restaurant is important to your FIL. Maybe MIL's favorite place? Maybe somewhere that FIL and MIL had some sort of romantic, heart-felt memory?
He wants to do something special SURPRISE! for his wife of 45 years. Which I applaud him for, but I understand your concern about money.
Please do not talk to MIL about this.
Does your DH have any other siblings? Maybe you all could possibly split the cost or gift your IL's money to go for the party expense?