Monitoring Project Performance with Post-Audit Information: Cash Flow Control Charts

ABSTRACT

An important aspect of the capital budgeting process is the post-audit, which involves (1) comparing actual results with those predicted by the decision-maker and (2) explaining why any differences occurred. When decision-makers systematically revise their uncertain initial forecasts with actual outcomes, there is a tendency for the estimates to improve. As any biases are observed and eliminated, management can improve operations and bring results and forecasts into agreement. This paper presents a post-audit method for the class of investment problems where each element of the cash flow forecast is uncertain. These problems have multiple, identical units with uncertain cash flow estimates, as found in many fleet replacement problems or in advanced manufacturing systems with multiple cells. This method graphically illustrates the uncertainty resolution that occurs, providing a means to post-audit and monitor the performance of a project through the development of Cash Flow Control Charts.