When Sue returned from her meeting with the CFO, there was a note from the Wine bottle facility manager, Ron Cross, waiting for her at her desk. She read through the note with enthusiasm, noting in particular the following summary of a proposed new bottle manufacturing facility: Amcor has commenced construction of its new wine bottle facility at Gawler in South Australia. The new plant is specially designed to produce premium wine bottles and will be built in collaboration with Leighton Contractors and Heye Glas of Germany. Upon completion, this facility and the technology it incorporates will be one of the most sophisticated in the world. The plant is expected to be completed in July and will produce in excess of 200 million wine bottles per year. This is a tremendous opportunity for Amcor as the wine industry is one of the fastest growing segments of the Australian economy and it is important for Amcor to participate in this industry. The wine industry has shown strong support for the development of this new plant and since announcing our intentions last August, numerous wineries have committed to purchase bottles from the plant. This investment reinforces our commitment to be the leading packaging company in Australia offering a broad range of packaging solutions for our customers. The plant will commence operations in mid-August and has a capital cost of around $130 million. Sales are expected to be around $80 million per year at full capacity However, in a separate handwritten note, he added “I am concerned about one thing and that is that the Net present value for the investment was calculated using weighted average cost of capital as the required rate of return on the project“. Sue rang him requesting further clarification as to why he was concerned. He responded to her as follows: “The weighted average cost of capital used is lower than the return on investment in some of the other divisional manufacturing plants in Australia”. Sue sought further clarification by asking: “Are you concerned that this may impact on the overall return on investment across Australia?” Ron said “yes” to this. Sue fully understood why this may cause problems. She knew other business unit managers may not be happy because this investment is going to have a lower rate of return. Sue thought very carefully about how to respond to Ron who was getting restless. He already had managers calling him regarding this and voicing their concern over the situation. One manager at the Queensland plant had called him and accused him of jeopardizing his annual bonus. She recalled what she had learnt in the management accounting course about the behavioral issues in performance evaluation arising from capital expenditure investments. Discussion forum questions

Q1 Discuss how investment in advanced technologies by AMCOR can be justified from a strategic perspective?

Q2 Describe the alternative methods used to evaluate capital expenditure decisions. What advice would Sue have for Ron on how to resolve negative behavioral issues?

Q3 Describe the strategic issues that AMCOR should consider when making a decision about leasing computers for its staff instead of buying computers.

Q4 Refer to the conversation between Sue and Ron about the use of weighted average cost of capital as the required rate of return on the project. Explain to Ron the underlying rationale for this practice in the typical capital investment decision process.