(Postinvestment audit) Karnes Group 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 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 op¬ erational, are included in the proposal. After the committee accepts a proj¬ ect, it approves an expenditure budget from the project’s inception until it becomes operational. The expenditures required each year for the expan¬ sions or replacements are also incorporated into Karnes Group’s annual bud¬ get 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.
Karnes Group does not have a procedure for evaluating projects once they have been implemented and become operational. The vice president of finance has recommended that Karnes establish a postinvestment audit pro¬ gram to evaluate its capital expenditure projects.

a. Discuss the benefits a company could derive from a postinvestment au¬ dit program for capital expenditure projects.

b. Discuss the practical difficulties in collecting and accumulating informa¬ tion that would be used to evaluate a capital project once it becomes operational.