You have received the following email:

From: Matt Spot, Finance Director

To: Financial Manager

Subject: all-day opening proposal – CONFIDENTIAL

Hello

I have just had an interesting meeting with Bilal Mukherjee, our Marketing Director. Bilal has been thinking of ways to put our restaurants to work during the day. At present, most of our restaurants are closed all morning and the afternoon between the end of lunch and the start of the evening rush. We are all well aware of the rapid growth of coffee shops in I-land over last 12 months; please see the attached newspaper article.

Bilal believes that we should open our restaurants to sell snacks, coffees, and light meals from early morning until early evening, with the exception of lunchtime when we would offer restaurant meals, so we wouldn't be interfering with our core business.

The main issue is the surprising expense required to start this venture. We would have to invest heavily in advertising and other promotions and would also need to seek separate permission from local government. Finally, we would have to buy a sophisticated coffee machine and equipment to heat and serve hot snacks for each restaurant. Our restaurants are equipped to cook pizza, not hot breakfast. Needless to say, we can't just buy the equipment and plug it in.

We will have to adapt our premises to make space for the new equipment. Bilal is suggesting that we introduce more family-friendly seating areas, removing a number of tables and replacing them with sofas and a toy kitchen area for young children to enjoy.

Bilal is concerned that the heavy outlays on advice for the local government applications, along with the significant investment in property, plant and equipment, will mean that this venture will have a very low accounting rate of return (ARR) for the first year. I rarely look beyond the net present value of a project, but he may have a point.

Please reply as soon as possible on the following:

Firstly, is this proposed all-day opening venture consistent with our strategic objectives?

Secondly, draft an explanation that I can take to the Board on possible reasons why the project's forecast ARR in the first year is so poor. Are forecast ARR results likely to give a good indication of the overall performance of the venture?

Matt