Question:
Smyth Brothers Inc. has formal policies and procedures to screen and approve capital projects. Proposed capital projects are classified as one of the following types:
1. Expansion requiring new plant and equipment
2. Expansion by replacement of present equipment with more productive Equipment
3. Replacement of old equipment with new equipment of similar quality All expansion projects and replacement projects that will cost more than $50,000 must be submitted to the top management capital investment committee for approval. The investment committee evaluates proposed projects considering the costs and benefits outlined in the supporting proposal and the long-range effects on the company. The projected revenue and/or expense effects of the projects, once operational, are included in the proposal. Once a project is accepted, the committee approves an expenditure budget for the project from its inception until it becomes operational. The expenditures required each year for the expansions or replacements are also incorporated into Smyth Brothers' annual budget procedure. The budgeted revenue and/or cost effects of the projects, for the periods in which they become operational, are incorporated into the five-year forecast. Smyth Brothers Inc. does not have a procedure for evaluating projects once they have been implemented and become operational. The vice president of finance has recommended that Smyth Brothers establish a post completion audit program to evaluate its capital expenditure projects.
a. Discuss the benefits a company could derive from a post completion audit program for capital expenditure projects.
b. Discuss the practical difficulties in collecting and accumulating information that would be used to evaluate a capital project once it becomes operational. (CMA adapted)