Capital Budgeting and Proj Costing at CMPDI.pdf

CENTRAL MINE PLANNING
AND DESIGN INSTITUTE
A PROJECT REPORT ON
“CAPITAL BUDGETING AND PROJECT COSTING”
AT CMPDI, RANCHI.
. (A SUBSIDIARY OF CIL)
SUBMITTED TO: MR. UJJAWAL CHATTERJEE
BY: SHREETI PRABHA
ROLL NO: 20B842170
DR. SHYAMA PRASAD MUKHERJEE UNIVERSITY, RANCHI

ACKNOWLEDGEMENT
It was a great opportunity to work as an intern at CMPDI. I gained a lot of knowledge and experience during
my internship. I express my deepest gratitude to Rajiv Kumar Singh, [Chief Manager (Geology), Exploration
Department, CMPDI] and Mr. Ujjwal Chatterjee, [Head of Department, Payroll], for giving me this chance, to
train at CMPDI.
My sincerest thanks to Mr. Jogendra, and Mr. Rahul Chatterjee (Internal Guide) for their support and
guidance throughout my training period. I am deeply indebted to them for patiently helping me understand
new things. Also, I thank Shweta Saini, HR Head and Aishwarya, a fellow colleague for facilitating my
internship and making the process easier. I also thank everyone at the department for providing pleasant
learning and working environment.
I extend my gratitude to Dr. Shyama Prasad Mukherjee University and its Finance Faculty for providing me
this opportunity to broaden my learning through practical application.
I thank my Head of the Department, Mr. Vikas Kr. Sharma for his constructive criticism throughout my
internship, support and guidance.
I express my deepest thanks to my family and friends for their unending love, help, and guidance.
SHREETI PRABHA

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INDEX
TOPICS PAGE NO.
INTRODUCTION 02
COAL INDIA - ABOUT 03-10
CMPDI PROFILE 11-14
ACHIEVEMENTS 15
CORPORATE SOCIAL RESPONSIBILITY 16-21
CAPITAL BUDGETING INTRODUCTION 22-23
WHY CAPITAL BUDGETING AND ITS PURPOSE 23-27
EXAMPLES OF CAPITAL BUDGETING TOOLS 28-29
ACCEPTANCE RULE 30
HOW CAPITAL BUDGETING TOOLS ARE USED AT
CMPDI
30-34
SUGGESTIONS AND RECOMMENDATIONS 35
CONCLUSION 36
BIBLIOGRAPHY 37
INTRODUCTION

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In this project report, I will be working on the project costing techniques of CMPDI where we will
focus on the Capital Budgeting tools and Decision-Making techniques of the company upon which
the rejection or the acceptance of the project depends at CMPDI.
The central mining planning and designing institute (CMPDI) is a subsidiary of the Coal India
Limited (CIL) which basically acts as the brain of the mining companies in India. The CMPDLI
provides technical assistance in the drilling of boreholes for the mining purpose and further the
planning and designing of the mines so we can say it is one of the most important PSU working
under the government of India for the generation of energy resources.
COAL INDIA LIMITED - ABOUT
Coal India Limited (CIL) an organized state-owned coal mining corporate came into being in
November 1975 with the government taking over private coal mines. With the modest production
of 79 million tons, at the year of its inception CIL, today is the single largest coal producer in the
world operating through single mining areas.
CIL is the apex body with seven wholly owned coal-producing subsidiaries and one-mile planning
and consultancy spread over 8 provincial states of India. CIL also manages 200 other
establishments like workshops, hospitals, etc. Further it owns 26 technical and management
training institutes and centers.
Coal India Limited (CIL) is an Indian state-controlled coal mining company headquartered in
Kolkata, West Bengal. It is the largest coal producer company in the world and contributes around
81% of the coal production in India. It produced 452 million tons of coal during FY 2012-13 and
earned a revenue of INR 882.81 billion from the sale of coal in the same financial year. Union
Government of India owns 61% of the shares in CIL and controls the operations of CIL through the
MINISTRY OF COAL. In April 2011, CIL was conferred the Maharashtra status by the Union
Government of India. On 31 March 2013, its market capitalization was INR 1.952 trillion (the US
$35.9 billion) making it India’s 5th most valuable company by market value.
● Halting wasteful, selective, and slaughter mining.
● Planned development of available coal resources.
● Improvement in safety standards.

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● Ensuring adequate investment for optimal utilization consistent with growth needs.
● Improving the quality of life of the workforce.
Moreover, the coal mining which hitherto was with private miners suffered from their lack of
interest in scientific methods, unhealthy mining practices, etc. The living conditions of miners
under private owners were substandard.
Formation of Coal India Limited
With the government's national energy policy, the near total national control of coal mines in
India took place in two stages in the 1970s. The coking coal mines (Emergency provision) Act 1971
was promulgated by the government on 16 October 1971 under which except for the captive
mines of IISCO, TISCO, and DVC, THE Government of India took over the Management of all 226
coking coal mines and nationalized them on May 1972. Bharat coking coal limited was thus born.
Further by the promulgation of the coal mines (tacking over of management) ordinance 1973 on
31 January 1973 the central government took over the management of all 711 non-coking coal
mines. In the next phase of nationalization, these mines were nationalized with effect from 1 May
1973, and a public
A sector company named coal mines authority limited (CMAL) was formed to manage these non-
coking mines.
A formal holding company in the form of Coal India Limited was formed in November 1975 to
manage both companies.
India is currently among the top three fastest-growing economies in the world. As a natural
corollary, India’s energy needs are fast expanding with its increased industrialization and capacity
addition in power generation. This is where ‘Coal’ steps in. In India coal is the critical input for
major infrastructure industries like Power, Steel, and Cement.
● Coal is the most dominant energy source in India’s energy scenario.
● Coal meets around 52% of primary commercial energy needs in India against 29% the
world over.
● Around 66% of India’s power generation is coal based.
● India is the 3rd largest coal-producing country in the world after China and USA.

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Coal India Limited -At A Glance
As discussed earlier Coal India Limited (CIL) as an organized state-owned coal mining corporate
came into being in November 1975 with the government taking over private coal mines. With a
modest production of 79 million tons at the year of its inception CIL today is the single largest
coal producer in the world. CIL also fully owns a mining company in Mozambique christened
'coal India Africana Limited; CIL also manages 200 other establishments like workshops,
hospitals, etc. Further, it also owns 26 technical & management training institutes of Coal
Management (IICM) as a state-of-the-art Management. Training Centre of Excellence the largest
Corporate Training Institute in India-operates under CIL and conducts multi-disciplinary
management development programs.
CIL having fulfilled the financial and other prerequisites was granted the Maharatna recognition
in April 2011. It is a privileged status conferred by the government of India to select state-owned
enterprises in order to empower them to expand their operations and emerge as global giants So
far the select clubs have only five members out of 217 central Public Sector Enterprises in the
country.
VISION
To emerge as a global player in the primary energy sector committed to providing
energy security to the country by attaining environmentally &socially sustainable
growth through best practices from mine to market.
MISSION
To produce and market the planned quantity of coal and coal products efficiently
and in eco-friendly a manner economically with due regard to safety,
conservation, and quality.

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Unmatched Strategic Relevance
1. Produces around 81.1% of India's overall coal production.
2. In India where approximately 52% of primary commercial energy is coal-dependent, CIL alone
meets the tune of 40% of primary commercial energy requirements.
3. Commands nearly 74% of the Indian coal market
4. Feeds 82 out of 86 coal-based thermal power plants in India
5. Accounts for 76% of the total thermal power generating capacity of the utility sector.
6. Supplies coal at prices discounted to international prices.
7. Insulates Indian coal consumers against price Volatility
8. Makes the end user industry globally competitive and thus, plays a key role in the "Indian
Growth Story" and making India incorporate globally competitive.
Corporate Structure & Subsidiary Companies
Coal India is a holding company with seven wholly owned coal-producing subsidiary companies
and one mine planning &Consultancy Company. It encompasses the whole gamut of identification
of coal reserves, detailed exploration followed by design and implementation, and optimizing
operations for coal extraction in its mines. The producing companies are:
1. Eastern Coalfields Limited (ECL), Sanctoria, West Bengal.
2. Bharat Coking Coal Limited (BCCL), Dhanbad, Jharkhand.

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3. Central Coalfields Limited (CCL), Ranchi, Jharkhand.
4. South Eastern Coalfields Limited (SECL), Bilaspur, Chhattisgarh.
5. Western Coalfields Limited (WCL), Nagpur, Maharashtra.
6. North coalfields Limited (NCL), Singrauli, Madhya
7. Mahanadi Coalfields Limited (MCL), Sambalpur, Orissa
8. Coal African Limitada, Mozambique.
9. The consultancy company is Central Mine Planning and Design Institute Limited (CMPDIL),
Ranchi, Jharkhand.
Products & Services
COKING COAL –
These coals, when in the absence of air, form coherent beads, free from volatiles, with strong and
porous mass, called coke.
● These have coking properties
● Mainly used in steel making and metallurgical
● Also used for hard coke manufacturing
SEMI COCKING COAL –
These coals, when heated in the absence of air form coherent beads coals not strong enough to
be directly fed into the blast furnace. Such coals are blended with coking coal in adequate
proportion to make coke. These have comparatively less cocking properties than coking coal
mainly used the blend-able coal in steel making, merchant coke manufacturing, and other
metallurgical industries
NEW COKING COAL –
This coal is not used in metallurgical industries, Because of its higher ash content, this coal is not
acceptable for washing in washeries. This coal is used for power utilities and non-core sector
consumers.
NON-COCKING COAL – These are coals without coking properties.
● Mainly used as thermal grade coal for power generation
● Also used for cement, fertilizer, glass, ceramic, paper, chemical, and brick manufacturing
and for other heating purposes

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WASHED AND BENEFICIATED COAL –These coals have undergone the process of coal
washing or coal beneficiation, resulting in value addition of coal due to reduction in ash
percentage.
● Used in manufacturing of hard coke for steel making
● Beneficiated and washed non-coking coal is used mainly for power generation
● Beneficiated non-cocking coal is used by cement, sponge iron, and other industrial plant
MIDDLINGS –Middling are by-products of the three-stage coal washing beneficiation process,
as a fraction of feed raw coal.
• Used for power generation.
• Also used by domestic fuel plants, brick manufacturing units, cement plants, industrial
plants, etc.
REJECTS – Rejects are the products of the coal beneficiation process after separation of cleans
and/or middling, as a fraction of needed raw coal.
• Used for fluidized Bed combustion (FBC) Boilers for power generation, road repairs,
briquette (domestic fuel) making, landfilling, etc.
CIL COKE/LTC COKE: CIL Coke /LTD Coke is a smokeless, environment-friendly
product of the Dankuni Coal Complex, obtained through low-temperature
carbonization.
• Used in furnaces and kilns of industrial units.
• Also used as domestic fuel by always, hotels, etc
COAL FINES/COKE FINES: These are the screened fractions of feed raw coal
and LTC coke /CIL Coke respectively, obtained from the Dankuni Coal Complex
and other coke over plants. Used in industrial furnaces as well as for domestic
purposes
TAR/ HEAVY OIL/LIGHT OIL/SOFT PITCH: These are products from the Dankuni Coal
complex using low-temperature carbonization of non-cocking coal in vertical retorts. Used
in furnaces and boilers of industrial plants as well as powerhouses, oil, dye,
pharmaceutical industries, etc.
Acquiring Assets Abroad-
That there would be a shortage of 350 million tons of coal by 2016-17. To meet this coal import it
is becoming increasingly evident that domestic coal demand is far outstripping the indigenous
production in India. The gap between demand and supply is ever expanding, especially showing
the wake of increased capacity addition in the power sector which is predominantly coal
dependent.

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In spite of best efforts, realistically CIL would not be able to satiate growing coal demand. Letters
of assurance issued so far are already in excess of CIL production Present analysis indicates
inevitable.
CIL has taken it upon itself in the interest of meeting the country's energy requirement and its
foraying into foreign shores for the acquisition of coal properties. For the purpose of CIL has
adopted 3 pronged approaches. Acquisition of coal properties directly on its own thorough
equity participation with coal mining properties abroad and thorough long-term coal-taking
contracts.
Transparency initiatives -
● Introduced e-auction for selling coal to any consumer from any location in a transparent
manner.
● Introduced integrity packed in high-value procurement.
● E-Procurement was introduced for speeding up purchases of vital inputs
Employee Welfare and CSR:
● Perseus structures CSR policies around coal mining areas to improve the quality of life with
community consensus and inclusive participation.
● Mobile dispensaries and wellness clinics introduced on a large scale
● Telemedicine facilities were introduced in central hospitals.
● Provides medical services to employees their families and local Populace through 86 fully
equipped hospitals and 5835 beds. Employee 1524 specialist doctors.

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Care for Environment
One of the most inherent tendencies of coal mining is the degradation of land and the
environment. CIL constantly addresses the impact of miming activities across environmental and
social issues.
Coal India has made a forestation over an area of around 32,000 hectares while the total area
degraded due to mining operations is around 12,800 hectares. This means for every hectare of
forest land degraded CIL has a plantation of 2.5 hectares of land.
Committed to minimizing the adverse impact of coal mining on the environment through
sustainable development activities. As a part of the clean and green program message plantation
has been taken by CIL. Wherever land is available CIL has to date planted over a 73 million trees.
CMPDI: PROFILE
The central miming planning and, designing institute (CMPDL) is a subsidiary of Coal India Limited
which basically acts as the brain of the mining companies in India. The CMPDI provides technical
assistance in the drilling of boreholes for mining purposes and furthers the planning and design
of the mines for the mining companies.
CMPDI undertakes the following types of jobs.
The services of CMPDI fall under the following broad heads.
a. Consultancy, e.g. formulation of a project report or a study report.
b. Tests/analysis, e.g. field tests or laboratory analyses.

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c. Operations/processing, e.g. field survey or data processing or training.
d. Installations /constructions, e.g. constructions/installation of a project or a plant.
All these are in the following fields.
A. MINERAL EXPLORATION
1. Geological Exploration
2. Geological, Geotechnical. & Allied support
B. MINING
1. Mine planning & design
2. Mining support services
C. ALLIED ENGINEERING
1. Engineering Planning & Design
2. Engineering Support Services
D. ENVIRONMENTAL MANAGEMENT
E. MANAGEMENT SYSTEMS
F. TRAINING SERVICES
FUNCTION
CMPDI functions through its corporate headquarters at Ranchi and its regional institute (RIS)
numbered1 to 7 located at Asansol, Singrauli and Bhubaneswar respectively along with various
field units and exploration camps. Dhanbad, Ranchi, Nagpur, Bilaspur,
The services of CMPDI fall under the following two broad heads.
(A) CMPDI'S BUSINESS FUNCTIONS, i.e. the consultancy and support for mineral exploration
mining, infrastructure engineering environment management, and management systems,
especially to the mineral, mining, and allied sectors, both within and outside the coal industry
and the country.
(B) CMPDI's corporate Responsibilities, i.e. as follows
Assisting the Ministry of COAL (MOC) and planning commission with strategic decisions relating to
the coal sector at the national level, e.g. through maintaining inventories of coal deposits, coal
miming potentials and operations, etc.

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Functioning as a nodal agency on behalf of the Government of India, e.g. for schemes funded
by MoCviz S&T projects, exploration Work in non-CIL blocks, Environmental measures and
subsidence Control (EMSC) Projects, and CBM clearing house; and for projects funded by CIL
R&D Board.
Liaison between MOC, CIL, and sister coal-producing companies on technical and operational
matters.
Working as an in-house planner and guide for coal-producing companies under CIL as their
integral part.
So, the services of CMPDI are for any of the following purposes.
● Services to pursue the company's business activities.
● Services to pursue research & development needs of the industry, either independently or in
association with some external agency /body.
Services technically similar to the above, but undertaken as its corporate obligations.
Regional Institutes -
The following are the seven Regional Institute (R.I.) of CMPDI IN India;
1. R.I.1: CMPDI- Alanson, west Bengal.
2. R.1:2: CMPDI-Koyla Nagar, Dhanbad, Jharkhand.
3. R.1.3: CMPDI – Kanke Road, Ranchi, Jharkhand
4. R.1.4: CMPDI- Jaripatka, Nagpur, Maharashtra.
5. R.1.5: CMPDI- Bilaspur, Chhattisgarh.
6. R.1.6: CMPDI- Singrauli, Madhyapradesh.
7. R.I.P: CMPDI- Bhubaneswar, Orissa.

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ORGANISATION CHART
BOARD OF DIRECTORS
1. SRI SHEKHAR SARAN (CHAIRMAN-CUM-MANAGING DIRECTOR)
2. SRI S.N. SHUKLA (DIRECTOR -T/CRD)
3. V.K. SINHA (DIRECTOR-T/RD&T)
4. SRI B.DAYAL (DIRECTOR-T/P&D)
In a layman's term, I would say that the CMPDI is basically a consultancy that provides technical
assistance and support to the mining companies. The CMPDI has seven regional institutes
distributed all over the country in different zones for this purpose. The 85% of the work is drilling
base while it has a 10% work concentration on planning and designing and the rest 5% is on the
Environment aspects of this purpose.

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ACHIEVEMENTS:
CMPDI has been awarded the commendation certificate of "scope Meritorious Award for R&D,
Technology Development and innovation, CMD, CMPDI, Shri A.K Singh, received the award from
H.E. President of India during a glittering ceremony of the public sector day on 11th April at Vigyan
Bhawan, New Delhi.
. CMPDI was conferred with the status of 'Mini Ratna' during 2009-10 and become the sixth subsidiary
company of CIL to achieve this feat. CMPDI has also been adjudged the 'Best Performing Subsidiary
Company of CIL 'for the year 2008-2009 as per MoU ratings. CMPDI has crossed the barrier of 4 lakh
meters of drilling in a year.
CMPDI has achieved a new record in the field of exploration. CMPDI along with various
agencies under its supervision has carried out approximately 5.22 lakh meters of drilling
during the year 2009-2010, hence registering a growth of 58%.
CMPDI has made a significant achievement under its management system consultancy services
rendered by CMPDI has enabled NCL to become the first mining company in the world to achieve
SABOOO certification at the company level which includes all its operations and functions.
CMPDI got the highest MoU rating with a composite score of 1.0 for the year 2009-10

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CORPORATE SOCIAL RESPONSIBILITY:
Corporate Social Responsibility (CSR) is a concept whereby organizations serve the interests of
society by taking responsibility for the impact of their activities on customers, employees,
shareholders, communities, and the environment in all aspects of their operations.
Corporate Social Responsibility is a company’s commitment to operating in an economically,
socially, and environmentally sustainable manner while recognizing the interests of its
stakeholders. This commitment is beyond statutory requirements. Corporate Social Responsibility
is, therefore, closely linked with the practice of Sustainable Development Corporate Social
Responsibility extends beyond philanthropic activities and reaches out to the integration of social
and business goals. These activities need to be seen as those which would, in the long term, help
secure a sustainable competitive advantage.
It was at United Nations Conference on Environment and Development (the “Earth Summit”)
in Rio de Janerio, 1992 that the concept of sustainable development evolved. Development
requires resources for the production of goods and services. Also to note is the type of
development we are witnessing. Despite the tremendous GDP growth in the past decade, we
still have a million peoples in our country who find it very hard to make their ends meet.
Corporate Social Responsibility is a way to provide or return to society the fruits of growth that
the corporate world has harvested. It is at the core, of the underlying principle of CSR and
sustainable development where they are inextricably striving to achieve similar ends. The
exploitation of natural resources has endangered our future generation 'prospects of using the
natural resources, thereby imperiling their existence. We owe our life and growth to Mother
Nature and hence should have a sense of responsibility for preserving it. In the 21" century,
the Industrial sector can no longer be limited as an arrangement for filling the pockets of
shareholders. It has to become a sector in which the management, workforce, consumer, and
the local populace, all play a part.
Especially in our country, where there is a glaring divide between sections of people in terms of
income and socioeconomic status, the CSR philosophy development, exorbitant use of natural
resources is inevitable. With the increasing population, there is bound to be tremendous pressure
on using them. Responsible business is the core of CSR and sustainability and it refers to the
commitment of an enterprise to operate in an economically, socially, and environmentally
sustainable manner while balancing the interest of diverse stakeholders. Stakeholders include

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employees, investors, shareholders, customers, clients, government and non-government
organizations, local communities, the environment, and society at large.
We at CMPDI believe that CSR does not emanate directly from external demands but is a process
by which our managers think about and evolve our relationship with our stakeholders for the
common good, and we demonstrate our commitment in this regard by adopting opportunity
business processes and strategies. We have already emphasized that CSR and sustainable
development are two sides of the same coin and so we believe in the philosophy that economic
and industrial development must go on in such a way that no irreparable damage be done to the
environment. In other words, the rate of consumption and use balance out of natural resources.
We at CMPDI believe that CSR does not emanate directly from external demand but is the process
by which our managers think about and evolve our stakeholders for the common good, and we
demonstrate our commitment in this regard by adoption of appropriate business processes and
strategies.
We have already emphasized that CSR and sustainable development are two sides of the same
coin and so we believe in the philosophy that economic and industrial development must go on
in such a way that no irreparable damage be done to the environment. Let's take a look at the
CSR activities at the CMPDI.

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Rehabilitation of Displaced Community
Coal India Limited has introduced a liberalized new Resettlement and Rehabilitation Policy, 2012.
The objective of the new policy is to provide greater flexibility in the resettlement and
rehabilitation of people affected by the coal mining project. It consolidates the different
resettlement and rehabilitation practices to determine the rehabilitation packages best suited to
local needs.
CMPDI prepares mine plans and we always keep the need of the displaced people in our mind
during the planning process. We try to address the apparent increase in air and noise pollution
due to mining operations. CMPDI prepares a detailed rehabilitation or reclamation plan which is
designed and approved for each coal mine, covering the period from the start of operation until
after mining has finished. Mine reclamation activities are undertaken gradually-with the shaping
and contouring of spoil piles, replacement of topsoil, seeding with grasses, and planting of trees
taking place on the mined-out areas.
As mining operations cease in one section of a surface mine, bulldozers and scrapers are used to
reshape the disturbed area drainage within and off the site is 5.
Carefully designed to make the new land surface as stable and resistant to soil erosion as the local
environment allows. Based on the soil requirements, the land is suitably fertilized and
revegetated. Reclaimed land can have many uses, including agriculture, forestry, wildlife
habitation, and recreation. We carefully monitor the progress of rehabilitation and usually
prohibit the use of the land until the vegetation is self-supporting. The cost of the rehabilitation
of the mined land is factored into the mine's operating costs.
Health and safety of workforce-
It is a popular belief that coal mine workers lead a difficult life. But due to the dedicated efforts
of Coal India Limited this: popular dictum no longer holds true, CIL is committed to the safety of
the Workforce in our mines. Over the years, the safety performance of CIL has improved
significantly. We are determined to improve the quality of life of all our workers and take every
possible step for their well-being. Regular health and safety checks are conducted for the
workforce and we intend to make these check-ups more frequent.

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EDUCATION PROGRAMS
Further educational assistance to the mining areas and coal mines-related society is also provided by the
CMPDI: The CMPDI also provided educational benefits and educational assistance to the people working the
in the mining areas for the CMPDI

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Capital Budgeting:
Capital budgeting (or investment appraisal) is the planning process used to determine whether an
organization's long-term investments such as new machinery, replacement machinery, new
plants new products, and research development project are worth the funding of cash through
the firm's capitalization structure (debt, equity or retained earnings). It is the process of allocating
resources for major capital, or investment, expenditures. One of the primary goals of capital
budgeting investments is to increase the value of the firm to the shareholders.
Capital Budgeting techniques:
Capital budgeting is the planning of long-term corporate financial projects relating to investments
funded through and affecting the firm's capital structure. Management must allocate the firm's
limited resources between competing opportunities (projects), which is one of the main focuses
of capital budgeting. Capital budgeting is also concerned with the setting of criteria about which
project should receive investment funding to increase the value of a firm, and whether to finance
the investment with equity or debt capital. Capital budgeting projects may include a wide variety
of different types of investments, including but not limited to, expansion policies, or mergers and
acquisitions. When no such value can be added through the capital budgeting process and excess
cash surplus exists and is not needed, then management is expected to pay out some or all of
those surplus earnings in the form of cash dividends or to repurchase the company's stock through
a share buyback program. In order to maximize the return to the shareholders of a company, it is
very important that the best or most profitable investment projects are selected. Because the
result of making a bad long-term investment decision can be both financially and strategically
devastating, particular care needs to be taken with investment project selection and evaluation.
There are the following types of Capital budgeting Techniques: Traditional
or Non-Discounting
1 Payback period
2 Accounting Rate of Return (ARR)
Time Adjusted or Discounted Cash flows:
1. Net present value (NPV)
2. Internal rate of return (IRR)
3. Profitability Index (P.I)
4. Modified Internal Rate of Return (MIRR)
5. Discounted payback

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An organization may use more capital investment evaluation techniques; some organizations use
different methods for different types of projects while others may use net present value,
profitability index, internal rate of return, modified internal rate of return, payback period, and
accounting rate of return.
Why Capital Budgeting-
The following points show why there is a need for capital budgeting, Optimum use of
scarce funds
✓ Long-term planning of profits
✓ Heavy investment planning
✔Worth maximization of shareholders
✓ Minimize the complication of investment decision
✔Forecasting future needs of cash
✓ Evaluation of long-term capital expenditure proposals.
✓ Comparison between various investment proposals
✓ Control on expenditures
✔Performance review
Purpose of capital budgeting-
The following are the reason for the purpose of capital budgeting;
1. Substantial Expenditure: A capital budgeting decision involves the investment of a substantial
amount of funds. It is, therefore, necessary for a firm to make such a decision after a thoughtful
consideration so as to result in a profitable use of its scarce resources the hasty and incorrect
decisions would not only huge losses but May also account for the failure of the firm.
2. Long time Period: The capital budgeting decision has its effect over a long period of time. These
decisions not only affect the future benefits and costs of the firm but also influence the rate
and direction of the growth of the firm.
3. Irreversibility: Most of the investment decisions are irreversible once they are taken firm may
not position to reverse them back. This is because as it is difficult to find a buyer for the 2nd
hand capital items.

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4. Complex decisions: The capital investment decision involves an assessment of future events
which is in fact difficult to predict. Further it is quite difficult to estimate in quantities terms all
the benefits or the costs relating to a particular investment.
Now let’s see the factors affecting the capital budgeting:
● Availability of funds
● Structure of capital
● Taxation Policy;
● Government Policy
● Lending Policies of Financial Institutions Immediate need of the Project
● Earnings
● Capital Return
● Economic Value of the Project
● Working Capital Accounting Practice
● Trend of Earning
● Risk of business
● Forecast of the market.
So how do we calculate the Pay Back period?
The formula for calculating the payback period is;
Total initial capital investment /Annual expected after-tax net cash flow.
Let’s take an example;
Suppose a project costs Rs.20, 00,000 and yields annually a profit of Rs.3, 00,000 after depreciation
@12.5%which follows the straight-line method, but before tax @ 50%.
The first step would be to calculate the cash inflow of this project, Here the cash inflow is Rs.4,
00,000 i.e. (300000+150000+250000)
Here tax deducted is Rs.150000@50% while deprecation Written off
is Rs.250000
Therefore, the payback period-Rs 2 00,000/ 4, 00,000-5years.
Now when we talk about the Net present value (NPV), it is calculated by the following formula:
NPV-Present value of net cash flow-Total net initial investment.
Let’s take an example to find out the NPV.
A project has an investment of Rs. 1, 00,000 and the following cash flows, if the company’s cost

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of capital is 10% then net Cash flows for the 1” year are Rs.55000 while for the 2nd year is Rs 8000
and for the 3rd year is Rs. 15000.
Here the PVIF @10% is given for three years-0.909, 0.826, and 0.751 respectively. So with the
above information, we calculate the discounted cash flows:
YEAR NET CASH FLOWS PVIF 10% DISCOUNTED CASH FLOWS
1 55,000 0.909 49,995
2 80, 000 0.826 66,080
3 15,000 0.751 11,265
Total 1,27,340
The total Discounted cash flows =1, 27,340
Less: Net Investment =1,00,000
Therefore, NPV = 27,340
Now likewise we calculate the NPV further we will deal with the other elements of the capital
budgeting the Internal Rate of Return (IRR).
The IRR method considers the time value of money, the initial cash investment, and all cash flow
from the investment. Unlike the net present value method, the internal rate of return method
does not use the desired rate of return but estimates the discount rate that makes the present
value of subsequent net cash flows equal to the initial investment will be zero. This estimated
rate of return is then compared to the
Criterion rate of return can be the organization’s desired rate of return, the rate of return from
the best alternative investment, or another rate of return the organization chooses to use for
evaluating capital investments.
Here, at CMPDI we use the IRR method as we don’t have an option over a project and we need to
decide whether to accept it or reject it, so the IRR determines the best return from a project.

So how do we calculate the IRR?
For an investment with uniform cash flow over its life the following equation is used;
A Total initial cash disbursement and commitments for net investment/ Annual net cash flow from
the investments.
Once A has been calculated, the discount rate is the interest rate that has the same discount
factor as A in the annuity table along the row for the number of periods of the useful life of
the investment. This computed Discount rate or the internal rate of return will be compared
to the criterion rate the organization has selected to assess the investment desirability.
Let’s take an example for a better understanding: An investment of Rs.1, 36,000 yields the following
cash inflows:
So here we find out the IRR
YEAR CASH INFLOW
1 30000
2 40000
3 60000
4 30000
5 20000
24

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Multiple Internal Rate of Return (MIRR):
In the case where project cash flows change signs or reverse signs or reverse during the life of a
project e.g.an initial cash outflow is followed by cash inflows and subsequently followed by a
major cash outflow, there may be more than one IRR and while the cost of capital is less than
the two IRR's a decision rule may turn out to be misleading as the project should only be invested
in the cost of capital is between IRR and IRR. To understand the concept of multiple IRR it is
necessary to understand the implicit reinvestment assumption in both NPV and IRR techniques.
Let's have a look over the advantages of the MIRR:
● This method makes use of the concept of the time value of money
● All the cash flows in the project are considered.
● IRR is easier to use as an instantaneous understanding of desirability can be determined by
comparing it with the cost of capital.
● IRR technique helps in achieving the objective of minimization of shareholders' wealth.
Now we all know that any derived method is not free from limitations so let’s have a look over
the limitation of this methodology:
● The calculation process is tedious if there is more than one cash outflow is interspersed
between the cash inflows, there can be multiple IRRS, the interpretation of which is difficult.
● The IRR approach creates a peculiar situation if we compare two projects with different
inflow/outflow patterns.
It is assumed that under this method all the future cash inflows of a proposal are reinvested
at a rate equal to the IRR It is ridiculous to imagine that the same firm has the ability to reinvest
the cash flows at a rate equal to IRR.
Example-
There are two projects; Project X and Project Y available for a firm and have a life of 6 years each
and require a capital outlay of Rs 9,000 each and an additional working capital of Rs.1000. The
cash inflows comprise a profit after tax + depreciation + interest for five years and have a salvage
value of Rs.500 for a project at year 6 plus working capital released also in the 6th year.

26
Net profit after tax –
YEAR PROJECT X PROJECT Y
1 1580 280
2 2080 1080
3 2080 1080
4 80 1080
5 80 2580
6 80 1880
TOTAL NET PROFIT, TAX 5980 7980
AVG ANNUAL NET PROFIT 5980/6=996.6 7980/6=1330
Taking into account the working capital released in the 6th year and salvage value of the
investment the total investment will be (10000-1500) Rs 8500and the average investment will be
(8500/2)=Rs 4250 for each project
While the rate of return calculations is:
Net profit after tax as a % of total investment:
Project X
Project Y
{(1130*100)/8500} =15.60%
Here the Investment decision should be made over selecting Project Y as the rate of return is
higher than the project X if both are mutually exclusive. While if it has been a case of an
independent project then both can be accepted if the minimum rate of return is 11.7%

27
Discounted Payback Period-
Some account prefers to calculate the payback period after discounting the cash flow by a
predetermined rate and the payback period. One of the most popular economic criteria for
evaluating capital projecting also is the payback period, Payback period is the time required for
cumulative cash inflows to recover the cash outflows of the project.
Year 1:Rs.6000 x 0.870-Rs.5220
Year 2:Rs.6000 x 0.756-Rs.4536
Year 3:Rs.6000 x 0.658-Rs.3948
Year 4:Rs.6000 x 0.572-Rs.3432 Year 5:Rs.6000 x 0.497-Rs.2982
So here the cumulative total of discounted cash flows after five years is Rs.20118.
Note: The discounted Payback is a more appropriate way of measuring the payback period since
it considers the Time Value of Money.
Acceptance Rule-
The Use of IRR, as a criterion to accept capital investment decisions, involves a comparison of
IRR with the required rate of return known as the cut-off rate. The project should be accepted
if the IRR is greater than the Cut-off rate. If IRR is equal to the cut-off rate the firm is indifferent.
If the IRR is less than the cut-off is rejected.
How Capital Budgeting Techniques Are Used By CMPDI –
The planning department at CMPDI basically involves the combination of technology and
efficiency i.e. techno efficiency and cost efficiency which simply means that the project has to be
technically and economically sound in order to give an optimum return.
A project starts with the activities of the geological department where geological reports are
prepared once the drilling activities are done. The geological reports indicate the area-wise coal
reserves after geological reports are prepared, actual works start while planning it has to be kept

28
in mind the supply and demand of the subsidiary should be the prime motto as no new plan can
be undertaken unless there is sufficient gap between demand and supply.
Once the gap is ascertained, the total no of project reports that have to be formulated is fixed.
Then once this thing is concluded it is examined what type of mine it is underground or open
caste, which depends upon the geological condition of the area.
So now let’s see what is an underground mine. An underground mine is where the mining activities are
carried out below the ground drilling is done and the boreholes are constructed, shafts are sunk to enter
into the coal bearing area and bring them to coal bearing area and bring them to the pit head by usual
methods for onward dispatch to the consumers.
Now, what is an open cast mine?
In an open cast mine, the mining activities are carried out above the ground i.e. soil rock, etc. are
cleared first by heavy earth moving equipment and the coal is extracted.
The steps of planning –
Once the type of mine is fixed then the planning department determines the most suitable
method of mining for underground miming like it may be manual or sometimes mechanized or
both. Open caste mining methods do not vary as widely as underground mining.
After the method is selected, the mining engineer works out the total machinery to use for the
extraction of coal in underground mine development is a wide term that includes preparations of
opening coal seams before actual coal extraction. Coal reserves remain in different seams and an
area is divided into several districts which are first developed.
The point from where the coal is extracted is known as the “face”, and the machinery which works
in the face is known as face machinery example HEMM, Conveyors Pumps, etc.
The mining engineer works out in face machinery for coal extractions mainly band informs the
engineering and mining department for the regulation of electrical and mechanical areas.

29
While the civil engineer is advised to work out the requirement of land service or industrial and
residential buildings, etc. More the total man power required for mining department in all areas
or aspects is also determined like for underground mining the man power is divided into
underground and surface. While in open caste all manpower is treated as surface Manpower. All
the departments prepare their own investment sheets showing the total requirements of
machinery buildings, etc.
Economist's role
Once the above-described works are concluded the job of the economist starts the above
department hand submit their investment sheets to the economists who on receiving,
assemble these investment sheets in the following major capital heads.
APPENDIX
1. Land 2. Railway siding and Fixtures
3. Buildings = Industrial or Residential 4. Prospecting and boring
5. Plant and Machinery 6. Development
a) Capital outlays in mimes
b) Water supply
c) Roads
d) Feasibility reports Preparation
7. Furniture and Fittings 8. Revenue expenditure
9. Vehicles
Now we see how revenue costs are calculated —
Wages –
When the manpower list is received from the P&D department the economist shall prepare categories
or scale-wise total no. of people that too depends on the nature of the mining activities i.e. underground
or the open caste project.

30
Calculation of man shifts –
Let's take for an individual, the total man shift is taken as follows,
1) Nonexecutives.
2) Executives.
3) Output per man shift equal to total annual output total by annual man shifts.
4) Earnings per man shift equal to total annual earnings by total annual man shifts.
5) Wages per turn are equal to earnings per shift earnings per man shift by output per man shift.
6) STORES
Underground Project-
The followings items of the store are generally found in an underground project
• Explosives
• Timber
• Vehicle
• Repair and maintenance
• Ventilation stopping
Opencast Project-
Diesel for HEMM:
● Rear dumpers: rate of diesel consumption by electric wheel rear dumpers
has been assumed as 85% of the mechanical dumpers
● Dozers: it is proposed to adopt the norm of 0.10 liters per BHP, per hour.
● Other HEMM; for all other HEMM the rate of diesel consumption may
adopt as per BHP per hour for the planning project
● Lubricant for HEMM: as per CMPDI norms lubricant will be calculated as
per electrical equipment, diesel electrical equipment, and diesel
mechanical equipment as per certain rates
● Repair and maintenance for HEMM
● Explosives
● Repair plant and machinery other than HEMM

31
● Vehicle store
● Miscellaneous store
Power –
This has to be given by the electrical engineer and is based on the optimum power demand and
current tariff rates. In underground projects, power cost is to be given for coal, and stowing in
open cast projects the power cost is to be given for all purposes on an overall basis.
Miscellaneous expenses including workshop debit-
TA, DA Stationary and printing
Repair and civil items Contingencies
Workshop debits Insurance
Coal deterioration Administrative charges
Depreciation Interest in working capital
Interest on loan capital (Here, loan capital is equal to total capital-township capital1/2) (Note;
Township capital includes colony portion of land, Residential buildings, roads, and water supply.) ~ This
is to be calculated separately as a cost sheet.
Cost of reclamation (Reclamation costs can be worked out separately or at a fixed rate per ton may
be charged.)

32
SUGGESTIONS AND RECOMMENDATIONS
From my point of view, CMPDI should also plan and design in other energy resources are other than
coal, which will extend its service area. Coal India Limited approves the projects which yield 12% IRR
at 85% capacity utilization.
I would like to suggest that 12% IRR at 85% capacity is comparatively a low figure even if compared to
the other PSUs.
Hence, I believe that the company should consider a little higher figure for the overall benefit and
for a sustainable business return in the present economic structure.
Lastly, I would suggest that the company should go for a couple of more subsidiaries.

33
CONCLUSION
Working at CMPDI as an intern was a knowledgeable endeavor. I have observed many things in the
organization that was quite new to me like the way the officials were and the overall daily process of work
at CMPDI was something insightful.
The capital Budgeting process generally helps the company in taking two types of decisions:
Investment decisions and financing decisions. When there is no proper planning regarding the
development of the project, there is always the risk of the sudden cost increase, delay in the development
of the project, regulatory complications, etc. Thus, like every successful company should, CMPDI executes
proper capital budgeting processes well in advance before initiating any large investment capital project.
Apart from the above risks, the capital budgeting processes helps to evaluate the growth and profitability
of the projects. The workforce at CMPDI ensures this.
This can also help to compare the profitability of different projects to be carried out by the company and in
prioritization of one project over the other. Also, the company will come under safe conditions in terms of
the regulatory requirements which results in the boost up of the various shareholders’ investment in the
company.
Thus, I learnt about these techniques while working on them in CMPDI, which was a great experience
altogether.

34
BIBLIOGRAPHY
1. Cost accounting and financial management –group 1 part 2, Taxman
2. NCERT MACROECONOMICS CLASS-12
3. PETERSON 7TH EDITION ON COST ACCOUNTING AND FINANCIAL MANAGEMENT
4. Official website of Coal India Limited - www.coalindia.in
5. Official website of Central Mine Planning and Design Institute - www.cmpdi.co.in
6. Annual report of CMPDI of FY 2021-22
7. Half yearly and quarterly reports on company’s financial updates

Capital Budgeting and Proj Costing at CMPDI.pdf

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