A Project Report On ―CAPITAL BUDGETING‖ For ―WESTERN COALFIELDS LIMITED‖ Submitted by ―MS.

Priti Krishnarao Rasegaonkar‖ Under the guidance of ―Mr. Uttam Sapate‖ Submitted to ―UNIVERSITY OF PUNE‖ IN Partial fulfillment of the requirement of the award of the degree of

MASTER OF BUSINESS ADMINISTRATION (MBA) Through ALL INDIA SHREE SHIVAJI MEMORIAL SOCIETY‘S INSTITUTE OF MANAGEMENT (MBA) KENNADY ROAD, PUNE 1 YEAR: 2010-2012

1

ACKNOWLEDGEMENT ―Success can never be attained without proper guidance‖ A project in an organisation is an experience wherein academic knowledge gained is applied in a practical manner. I had an opportunity to complete my summer project in ―WESTERN COALFIELDS LIMITED, NAGPUR.‖ The project is great source of learning & a good experience as it made me aware of professional culture & conducts that exist in an organization. Inspection & Guidance are valuable in all aspects of life especially in an academic field. I would like to express my gratitude to Dr. SINHA, Director, who mentored me for successful completion of this project. I am also thankful to WESTERN COALFIELDS LIMITED, NAGPUR. For permitting me to purse the project in their esteemed concern and also to all the employees of western coalfields ltd. I express my sincere thanks to Prof. Dr.Uttam Sapate, without his guidance & inspiration; I could not have completed my project. I would like to express my heart full thanks to company employees (Finance department), who gave me all the necessary information and guidance in completion of this project. I will always carry fond memories of these training days.

Priti K.Rasegaonkar

2

DECLARATION

I, Miss. Priti K. Rasegaonkar, a student of AISSMS Institute of Management, Kenedy road, Pune, hereby solemnly declare that the project report entitled “CAPITAL BUDGETING‖ with special reference to Western Coalfields Limited, NAGPUR was carried out by me in partial fulfillment of M.B.A. Program according to the Pune University rules and norms and had no commercial interest or motive.

Further, I also declare that I have tried to my level best to complete this project with almost sincerely, honestly and accuracy, even then if, any mistake or error has crept in I shall most humbly request to reader to point out those errors,any suggestion regarding this project will be most welcome.

It is my original work and is not submitted to any other organization for any other purpose.

Date: Place:

Priti K.Rasegaonkar

3

EXECUTIVE SUMMARY Introduction: A project is about the Capital Budgeting, A Capital Budgeting is a method which is implemented in most of the organization and proper as well as planned implementation provides fruitful results i.e. in terms of profit maximization and growth of the company in a high competitive environment.

Reason for Selecting Topic: Capital Budgeting is a very crucial part of FINANCE activities for any organization and management devote significant amount of time and efforts for this activity.

Scope Of Project: This research project aims at studying and analyzing the current practices of capital budgeting at Western coalfields ltd. (WCL). The research project would help WCL to implement new and better techniques of capital budgeting while evaluating new projects i.e. acquiring new coal mines.

Company Profile: Western Coalfields Limited (WCL) is one of the eight Subsidiary Companies of Coal India (CIL), which is under administrative control of Ministry of Coal.

Industry Profile: Coal India Limited (CIL) is a Schedule 'A' 'Navratna 'Public Sector Undertaking under Ministry of Coal, Government of India, with Headquarters in Kolkata, West Bengal. CIL is the single largest coal producing company in the world.

Objectives: The primary objective of the project is to study the Capital Budgeting techniques required for financial investment of company. And to study and understand the current trend, procedure & implementations of capital budgeting techniques at WCL. 4

Research Methodology: Research is a process of collecting, analyzing and interpreting information to answer questions. It is structured enquiry that utilizes acceptable, scientific methodology to solve problems and create new knowledge.

Conclusion: After doing study, I came to a conclusion that the projects are evaluated based on 12% IRR.

Suggestions and Recommendations: After doing a study it is observed that there is hierchy and approval takes very long time. The methods of Capital Budgeting may be utilizes in an effective way.

5

CHAPTER – I INTRODUCTION

6

1.1 INTRODUCTION:A project is an activity sufficiently self- contained to permit financial and commercial analysis. In most cases projects represent expenditure of capital funds by pre- existing entities which want to expand or improve their operation.

In general a project is an activity in which, we will spend money in expectation of returns and which logically seems to lead itself to planning. Financing and implementation as a unit, is a specific activity with a specific point and a specific ending point intended to accomplish a specific objective.

To take up a new project, involves a capital investment decision and it is the top management‟s duty to make a situation and feasibility analysis of that particular project and means of financing and implementing it financing is a rapidly expanding field, which focuses not on the credit status of a company, but on cash flows that will be generated by a specific project.

Capital budgeting has its origins in the natural resource and infrastructure sectors. The current demand for infrastructure and capital investments is being fueled by deregulation in the power,

telecommunications, and transportation sectors, by the globalization of product markets and the need for manufacturing scale, and by the privatization of government owned entities in developed and developing countries.

The capital budgeting decision procedure basically involves the evaluation of the desirability of an investment proposal. It is obvious that the firm most have a systematic procedure for making capital budgeting decisions.

7

1.2 CAPITAL BUDGETING:-

Capital budgeting is one of the most important factors in the process of corporate decision-making. Data from numerous previous studies show that managers prefer the simple payback period method (non-discounted payback model) over the net present value method (discounted cash flow model), which academics consider as superior.

Capital budgeting is a required managerial tool. One duty of a financial manager is to choose investments with satisfactory cash flows and rates of return. Therefore, a financial manager must be able to decide whether an investment is worth undertaking and be able to choose intelligently between two or more alternatives. To do this, a sound procedure to evaluate, compare, and select projects is needed. This procedure is called capital budgeting.

1.3 WHAT IS CAPITAL BUDGETING ?

The term Capital Budgeting refers to the long-term planning for proposed capital outlays or expenditure for the purpose of maximizing return on investments. The capital expenditure may be:

(1) Cost of mechanization, automation and replacement.

(2) Cost of acquisition of fixed assets. e.g., land, building and machinery etc.

(3) Investment on research and development.

(4) Cost of development and expansion of existing and new projects.

8

Capital budgeting is a process used by companies for evaluating and ranking potential expenditures or investments that are significant in amount. The large expenditures could include the purchase of new equipment, rebuilding existing equipment, purchasing delivery vehicles, constructing additions to buildings, etc. The large amounts spent for these types of projects are known as capital expenditures.

Capital budgeting usually involves the calculation of each project‟s future accounting profit by period, the cash flow by period, the present value of the cash flows after considering the time value of money, the number of years it takes for a project‟s cash flow to pay back the initial cash investment, an assessment of risk, and other factors. Capital budgeting is a tool for maximizing a company‟s future profits since most companies are able to manage only a limited number of large projects at any one time.

1.4 INVESTMENT DECISIONS

The Capital Budgeting decision denotes a decision situation where the lump sum funds are invested in the initial stages of a project and the returns are expected over a long period. The capital budgeting decision involve the entire process of decision making relating to acquisition of long term assets whose returns are expected to arise over a period beyond one year, Planning and control of capital expenditures is a major decision area in any organization.

9

1.5 IMPORTANCE OF INVESTMENT DECISIONS:-

Capital investments, representing the growing edge of a business, are deemed to be very important for three inter- related reasons.

1. The influence firm growth in the long term consequences capital investment decisions have considerable impact on what the firm can do in future.

2. They affect the risk of the firm; it is difficult to reverse capital investment decisions because the market for used capital investments is ill organized and /or most of the capital equipments bought by a firm to meet its specific requirements.

3. Capital investment decisions involve substantial out lays. Capital budgeting is more or less a continuous process and it is carried out by different functional areas of management such a production, marketing, engineering, financial management etc. All the relevant functional

departments play a crucial role in the capital budgeting decision process.

10

CHAPTER –II

COMPANY PROFILE

11

2.1 ABOUT THE COMPANY : WESTERN COALFIELDS LIMITED

Western Coalfields Limited (WCL) is one of the eight Subsidiary Companies of Coal India (CIL), which is under administrative control of Ministry of Coal. The Company incorporate under the Companies Act, 1956 has its registered office at Coal Estate, Civil Lines, Nagpur-440001.

The Company contributes about 11.3% of the national coal production. It has mining operation spread over the states of Maharashtra (in Nagpur, Chandrapur and Yeotmal Districts) and Madhya Pradesh (in Betul and Chandrapur Districts).

The company is a major source of supplies of Coal Industries located in Western India in the States of Andhra Pradesh, and Gujarat and also in Southern India in the States of Andhra Pradesh, Tamil Nadu, Karnataka and Kerala. A large number of Power Houses under Maharashtra, Madhya Pradesh, Gujarat, Karnataka, Punjab and Uttar Pradesh- Electricity Boards are major consumers of its coal along with cement, chemical, fertilizer, paper and brick Industries in these states. The company came into being on 1st November, 1975, after reorganization of the nationalized coal industry. At that juncture, the operations of WCL were spread over the States of Maharashtra and M.P. organized into 10 Coal producing Areas, one workshop to provide services of repair and maintenance of Machineries/ Equipment and One Coal Washeries.

By the year 1985-86, number of mines had increased to 130 and total production to 48.89 Million Tonnes. Keeping in view the tremendous growth programme the company was bifurcated, with effect from January 1986, into South Eastern Coalfields Limited and the present Western Coalfields Ltd. 12

The command area of WCL has reserves of 11079 Million Tonnes of coal, out of 2, 45,692 Million Tonnes in India as on 01.01.2004. With 4.51% of coal reserves WCL contributes about 13% towards CIL production and 11% towards national coal production.

WCL has made concerted progress rationalizing its manpower. Despite increase in production from a level of 22.78 Million Tonnes to 39.53 Million Tonnes during the period 1990-91 to 2003-04, WCL is able to gradually reduce its overall manpower and increased production and productivity.

2.2COAL TYPES: Chemically „Coal‟ is made of carbon, hydrogen, oxygen, nitrogen and some other impurities. The main constitute of coal are:

Carboneous

Non-Carboneous

Vitarin Clarin

Ash Moisture Volatile Matter Fixed Carbon

Basically Coals are four types:

1. Anthracite 2. Bituminous 3. Lignite 4. Peat

13

WCL is mainly concerned with bituminous coal. These are mainly of two types:-

1. Coking Coal 2. Non-Coking Coal

Coking Coal is that variety of coal which contains less percentage of ash and has high heat value. It can convert into hard coke which is suitable for iron and steel industry.

Non-Coking coal is that variety of coal which contains high percentage of ash and has low heat value.

2.3 METHOD OF EXTRACTION OF COAL: Coal is obtained from the earth‟s surface called mines. Mines are of two types:

1) OPENCAST MINES:

In this type of mine, attempt is made to reach the level of coal seam with the help of technology, by removing the over burden (i.e. after removing everything lying above the coal seam). For this heavy machines like HEMM (Heavy Earth Moving Machine) are used and the manpower is reduced.

2) UNDERGROUND MINES:

In this type of mine technology attempts to reach the coal seam not by removing the overburden but through a pit. These mines are in those areas where the coal seam is deep. The over burden remains intact and the workers dig the ground.

The workers are sent to the level of coal seam either through shaft (an in clination) or through lift i.e. DOLI. There is optimum utilization of manpower in these mines. 14

In this type of mines, there is high risk of accidents due to the fall of roofs and sides. In order to avoid these accidents thrust is given to provide support of green roof with steel supports like steel cogs, pit props, roof bolts, W-straps, etc.

2.4 AWARDS AND CERTIFICATES :  WCL is recipient of „Vanashree Award” from Govt. of Maharashtra for afforest ration.  WCL received “Jawaharlal Nehru Memorial Award” from International Green Land Society for effective implementation pollution control measures in the mining areas.  WCL received “India 2000 Millennium Award‟ from World Peace for WCL„s contribution in motivating the employees on environmental protection works at projects and mines.  WCL received “Appreciation Certificates” from social forestry

department Government of Maharashtra for spectacular contribution in afforest ration in the Vidharbha region.  Umrer and Padampur are the first among the coalmines in the country to get ISO-9001: Quality management system certifies certificate from SGS United Kingdom Ltd.  WCL was ranked 87th in the list of Indian Globally competitive Companies (published in Business World, 17th June issue).

15

2.5 WCL AT A GLANCE :

Number of working mines: 01.04.2011 Opencast Underground Mixed (OC+UG) Total : : : : 38 43 02 83

Coal Production (Million Tonnes) Opencast Underground Total

Actual 2010-11 34.95 08.70 43.65

Actual 2009-10 36.12 09.62 45.74

Manpower (as on) Executives Monthly Rated

1.4.2011 2409 12058

1.4.2010 2196 12702

16

Daily Rated Piece Rated Transfers/Casuals and Company Trainee

39812 4182 582

41051 4494 427

Total Manpower Reduction

59043 1827

60870 1622

2.6 FINANCIAL PERFORMANCE :

The turnover of the company during the year 2010-11 was Rs.7073.44 crores against budgeted Rs.6765.74 crores. The net profit for the year is Rs.1067.97 crores against budget of Rs.386.12 crores. The total sales realization during 2010-11 was Rs.7314 crores. The company has paid Rs.504.74 crores by way of corporate taxes to Central Government during the year 2010-11.

17

The year-wise profit earned by WCL is given below:

(Rupees in Crores)

Year

Profit

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

310.20 472.53 743.60 935.30 1446.96 1054.44 930.22 516.12 931.03 1067.97

BUDGET (AAP) 2011-12

438.23

18

Profit
1600 1400 1200 1000 800 600 400 200 0 Profit Budgeted Profit

19

CHATER-III

INDUSTRY PROFILE IN INDIA

20

INDUSTRY MEANING The Production Side Of Business Activity Is Referred As Industry. It Is A Business Activity, Which Is Related To The Raising, Producing, Processing Or Manufacturing Of Products. The Products Are Consumer‟s Goods As Well As Producer‟s Goods. Consumer Goods Are Goods Which Are Used Finally By Consumer E.G. Food Grains, Cosmetics Etc. Producer‟s Goods Are The Goods Used by Manufactures for Producing Some Other Goods E.G. Machinery, Tools, Equipments, Etc. Expansion Of Trade and Commerce Depends on Industrial Growth. It Represents The Supply Side Of Market.

Classification/Types of Industries There Are Various Types of Industries. These Are Mentioned as Below:-

Types of Industries

Primary Industry

Generic Industry

Service Industry

Manufact uring Industry

Constructi on Industry

Extractive Industry

Explanation:

Primary Industry Primary Industry Is Concerned With Production Of Goods With The Help Of Nature. It is Nature Oriented Industry, Which Requires Very Little Human Efforts. E.g.-Agriculture, Farming, Fishing, Forestry, Etc.

21

Genetic Industry Genetic Industries Are Engaged In Re-Production And Multiplication Of Certain Spices Of Plants And Animals With The Object Of Sale. The Main Aim Is To Earn Profit From Such Sale. E.g.-Cattle Rearing, Poultry, plant Nurseries, Etc.

Service Industry In Modern Times Service Sector Plays An Important Role In The development Of The Nation And Therefore It Is Named As Service Industry. The Main Industries Which Fall Under This Category Include Hotel Indusrty, Tourism Industry, And Entertainment Industry, Etc.

Manufacturing Industry Manufacturing Industries Are Engaged In Transforming Raw Material Into Finished Products With The Help Of Machines And Manpower. The Finished Goods Can Be Either Consumer Goods Or Producer Goods. E.g.-Textiles, Chemicals, Paper Industry, Sugar Industry, Etc.

Construction Industry Construction Industries Take Up The Work Of Construction Of Buildings, Bridges, Roads, Dams, And Canal, Etc. These Types Of Industry Are Different From All Other Types Of Industry Because In Case Of Other Industries Goods Can Be Produced At One Place And Sold At Another Place. But Goods Produced And Sold By Constructive Industry Are Erected At One Place.

Extraction Industry Extractive Industries Is Concerned With Extraction Or Drawing Out Goods From The Soil, Air Or Water. Generally Products Of Extractive Industries Come In Raw Form And They Are Used By Manufacturing And Construction Industries For Producing Finished Goods. E.g.-Mining Industry, Coal Mineral, Oil Industry, Etc. 22

3.1 INTRODUCTION

Coal - the Black Diamond Coal is the primary source of energy. Coal accounts for over 50% of India's commercial energy consumption and about 78% of domestic coal production is dedicated to power generation. The inventory of Coal in India are estimated to be around 285.86 Billion Tonnes (as on 1st April, 2011), which constitute about 0.8% of the Global Coal reserves, whereas it's production contribution is around 7%. India today is one of the major coal producers in the World and ranks at 3rd position after China and USA.

Birth of Coal India Limited Coal Mining first started in India in the year 1815. The private Railway Companies started mining activities in the year 1850. The

Railway Board Nationalized the coal mining in 1925. The Railway collieries were transferred to the Coal Board in the year 1944.

Coal mining through national sector first started from 01.10.1956 with the establishment of National Coal Development. After Nationalization of NonCoking Coal sector in 1973 NCDC become the Central Division of Coal mines Authority Ltd. Again in the year 1975 with the re-organization of CMAL as Coal India Ltd.

3.2COAL INDIA LIMITED +A PROFILE

Shri S. Narsing Rao is a Chairman-cum-Managing-Director of CIL.

Coal India Limited (CIL) is a public sector undertaking of the Indian Government. It is the world's largest coal miner. It is 90% owned by the Union Government, under the administrative control of the Ministry of Coal of India and 10% public Share holding. It is involved in coal mining and production industry. 23

Coal India Limited (CIL) is a Schedule 'A' 'Navratna 'Public Sector Undertaking under Ministry of Coal, Government of India, with Headquarters in Kolkata, West Bengal. CIL is the single largest coal producing company in the world and the largest corporate employer in the country with manpower of 409,332 (as on 1 July 2009). With proven coal reserves of 105.82 Billion Tonnes out of total reserves of 267 Billion Tones (as on 1 April 2009) Coal India plays a pivotal role in Indian energy scenario.

CIL contributes around 85% of coal production in India; it is the largest company in the World in terms of coal production. Employs nearly 4.25 Lakhs persons and is the largest corporate employer in the country. It is one of the largest Companies in the country, turn over being around Rs. 386.31 billion in 2007-08. It is one of the largest tax payers (Corporate Tax Rs.35.75 billion) in 2007-08 and has paid Dividend of Rs17.054 Billi on to the Govt. of India in 2007-08.

Today, Coal India has eight Subsidiary Companies including CMPDI, and is one of the largest Corporate Employers of the world, employing about 3.83 Lakhs people. CIL produced 431.32 Million Tonnes of coal during the year 201011. Presently, about 90.72% of CIL's production comes from Opencast Mines.

3.3 ABOUT THE COMPANY

Name: -COAL INDIA LIMITED (CIL) Date of incorporation:-21.10.1975 Corporate status:-The Company is incorporated under the Companies Act 1956, and is 90% owned by Government of India and 10% public Share holding. Business:-Engaged in the mining of coal, coal based products and mining consultancy.

24

VISION: To emerge from the position of domestic leader to leading global player in the energy sector by adopting best practices from mine to market with due care to environmental and social sustenance.

MISSION: Produce the planned quantity of coal efficiently and economically with due regard to safety, conservation & quality.

Coal India Limited was formed on 21st October, 1975 as a holding company with five subsidiaries:     

Bharat Coking Coal Limited (BCCL),- Dhanbad Central Coalfield Limited (CCL),- Ranchi Western Coalfield Limited (WCL),- Nagpur region Eastern Coalfield Limited (ECL),- Asansol Central Mine Planning and Design Institute Limited (CMPDIL),- Ranchi

Several years Later, FOUR more subsidiaries were added:    

Mahanadi Coalfield Limited (MCL),- Raurkela South Eastern Coalfield Limited (SECL),- Bilaspur North Eastern Coalfield Limited (NECL),- directly under control of coal India limited Northern Coalfield Limited, Singrauli (NCL),- Singrauli

25

3.4 CORPORATE STRUCTURE:

3.5 COAL RESERVES IN INDIA 

Coal Reserves in India

Coal and oil are two primary energy resources in India. Coal forming about 85% of coal production in India.

Coal Production of Last 5 years 26

The resources of Coal India are estimated to be around 43.65 million Tones 2006-2007 which constitute about 0.8% of global Coal reserves, whereas it‟s production contribution is around 7% India today one of the major coal producers in the world and ranks at 3rd position.

3.6 Production and Growth :

Produces over 400 Million Tonnes of Coal annually. Coal production ending Financial Year 2011 was 431.32 Million Tonnes (MTs).

3.8 Cares for Environment : Committed to minimize the adverse impact of coal mining on environment through well structured Environment Management Plans and sustainable development activities. As a part of 'Clean & Green' programme, massive plantation has been taken up by CIL wherever land is available. CIL has till date planted over 73 million trees. A positive result of this effort towards improvement of environment. 27

3.9 Special Achievement :

1. The Utilization of Draglines, Dumpers and Dozers of WCL is FIRST in CIL, while in case of Shovels, it is SECOND. 2. The Availability of Shovels, Dumpers, Dozers and Drills is higher than same period of last year.

3.10 Core values :  Commitment.  Customer Satisfaction.  Continuous Improvement.  Concern for Environment.  Creativity & Innovation.

3.11 LOCATION MAP :

28

29

FINANCE DEPARTMENT:- Organization Chart DIRECTOR (FINANCE)

G.M (finance)

G.M (corporate treasury)

G.M (cost & budget)

GM (sales a/c)

G.M (internal audit)

C.F.M (corporate a/c

& tax)

Dy. C.F.M

F.M establishment Dy.C.F.M F.M (Administration& concurrance) F.M (sales a/c) F.M (concurrence) Dy. C.F.M

F.M F.M F.M (cost& rev. budget)

F.M (capital budget &MIS) F.M F.M

(Expenditure) (Cash Section)

F.M (fund mgmt)

F.M (derivative transactions) F.M (corporate a/c F.M

(Indirect & Tax) tax)

30

CHAPTER -IV

OBJECTIVES & SCOPES

31

OBJECTIVES, SCOPE OF THE STUDY
2.1Objectives of the study:1. To study the Capital Budgeting techniques required for financial investment of company. 2. To study and understand the current trend, procedure & implement-ations of capital budgeting techniques at WCL. 3. To analyze the tools and techniques used in preparing capital budget. 4. To understand the nature of capital expenditures. 5. To estimate the total capital expenditure requirements for projects. 6. To approximate & establish the sources of capital to fund these projects.

2.2 Scope of the study:-

The scope of this project report is limited to the WCL in Nagpur. Experience of working at the corporate level and knowing about various management strategies and policies was very fruitful.

1. This research project aims at studying and analyzing the current practices of capital budgeting at Western coalfields ltd. (WCL). 2. The research project would help WCL to implement new and better techniques of capital budgeting while evaluating new projects i.e. acquiring new coal mines. 3. This study would help WCL to find out various ways to fulfill the capital requirements of the company. 4. It would help the company to improve the profit ability of their projects. 5. This study is carried out using actual data and information provided by various sources at WCL. CIL has complete monopoly in the production, trade and marketing of coal. Hence, this study has a wide scope in the entire coal producing companies and other subsidiaries of Coal India Ltd. (CIL).

32

CHAPTER V

RESEARCH METHODOLOGY

33

5.1 RESEARCH METHODOLOGY

Methodology used in the study: For carrying out this study, a lot of efforts have been made. Through this type of vast organization these efforts are normal but not irrelevant. It might have little use but it is not so that it has no use. So we tried our level best for carrying out this study and used following method to achieve these objectives of the study. ―Research concerns itself with obtaining information through observation that can be used to systematically develop logically related proportion so as to attempt to establish casual relationship among variables.‖ - By Black and Champion. Sources of Data Data constitutes the subject matter of analysis. The relevance, adequacy and reliability of data determine the quality of the study. There are various methods of data collection which involves the use of specific recording forms. These are called tools or instruments of data collection. Data is primarily of two kinds; 1. Primary Data 2. Secondary Data 1. Primary Data: Data that is collected for the specific purpose at hand is called as primary data. It is customized according to the needs of the researcher and focuses exclusively on the current research problem. The collection of the primary data is time consuming. It calls for the greater planning and coordination. The primary data has been collected by conducting formal & informal discussions with the staff members WCL, Nagpur. Personal meeting with senior finance executives. 34

2. Secondary Data: Secondary data means data that is already available in various reports, diaries, letters, books and periodicals. Secondary data is that, which has been used previously for any research and is now in use for the second time, is called Secondary Data. Secondary data serves as a reference for the study. The secondary has been collected from;       The company‟s annual reports The company‟s brochure

Reference books

Magazines

WCL Intranet

Company Records

Personal meeting with senior executive: After analysis of past records for understanding various things it was very important to meet finance executives and managers. To understand the reason behind the increase or decrease in profit it was indispensable to talk with the person who are directly involved in this process. Therefore, I decided to talk with top officers, senior executives of the finance and administration department. Thanks to all those managers and executives whom I wished to talked and talked. They co-operated with necessary data and talk very freely with me. Walk talked about past data, present scenario and even predicted about the future.

35

Analysis of Past records: Records of last years of trading and profit and loss accounts, balance sheet and cash flow statement of WCL are collected.

Limitation: Primary and secondary data has been collected from various resources but it was easy to collect all the data due to safety reason and security concern. That is why some problems had come in collecting data. I have tried my best for collecting data.

36

CHAPTER VI

THEOROTICAL BACKGROUND

37

6.1 CAPITAL BUDGETING Capital budgeting decision is an important criterion, which affects the profitability of a company. A capital budgeting decision is defined as the investing of a firm‟s current fund efficiently in long-term assets in anticipating of an expected flow of benefits over a period of time. So, capital budgeting involves: * Exchange of current funds for long-term assets. * Benefits from long-term assets spread over a period of time. The capital budgeting decision involves commitment of large amount of funds in the long term assets. These decisions are irreversible and the commitment of funds to longterm assets changes the risk complexion of the firm. A capital budgeting may be defined as the firms decision to invest its current fund most efficiently in the long term asset in anticipation of expected

flow of benefits over a series of year.

Capital budgeting is process of selecting best long term investment project. Capital budgeting is long term planning for making and financing proposed capital out laying. 6.2 DEFINITION OF CAPITAL BUDGETING

Capital Budget is also known as "Investment Decision Making or Capital Expenditure Decisions" or ―Planning Capital Expenditure" etc. Normally such decisions where investment of money and expected benefits arising there from are spread over more than one year, it includes both raising of long-term funds as well as their utilization.

38

Charles T. Horngnen has defined capital budgeting as "Capital Budgeting is longterm planning for making and financing proposed capital outlays."

In other words, capital budgeting is the decision making process by which a firm evaluates the purchase of major fixed assets including building, machinery and equipment.

According to Hamption, John. 1, "Capital budgeting is concerned with the firm's formal process for the acquisition and investment of capital." From the above definitions, it may be concluded that capital budgeting relates to the evaluation of several alternative capital projects for the purpose of assessing those which have the highest rate of return on investment. Capital budgeting is an assessment, where large finances are invested in the early stages of the venture and the profits are expected over an extended period of time. These decisions are related to allotment of capital to diverse long-term assets.

6.3 Features of investment Decisions 1. The exchange of current funds for future benefits. 2. The funds are invested in long-term assets. 3. The future benefits will occur to the firm over a series of year.

6.4 Importance of Investment Decisions Investment decisions requires because of the following reasons:      They influence the firm‟s growth in the long run. They affect the risk of the firm. The involve commitment of large amount of funds. They are irreversible, or reversible at substantial loss. They are among the most difficult decision to make. 39

6.5 Types of Investment Decisions One classification is as follows:    Expansion of existing business Expansion of new business Replacement and modernization.

Yet another useful way to classify investment is as follows:  Mutually exclusive investment  Independent investment  Contingent investment.

6.6 Investment Evaluation Criteria Three steps are involved in the evaluation of an investment:  Estimation of cash flows  Estimation of the required rate of return  Application of a decision rule for making the choice.

6.7 Three types of capital budgeting:1. Accept and reject decision. 2. Capital rationing decision. 3. Mutually exclusive choice decision.

1. Accept and Reject Decision:Proposal in which rate of return is more than the invested rate. i.e. – output is more that input. In this all independent project are accepted. Independent project are those which is not complete with others. 40

2. Capital rationing decision:Capital rationing means distribution of capital in favors of more acceptable proposals. A firm determines a certain point for selecting accepted proposals.

3. Mutually exclusive choice decisions:Mutually exclusive investment serves the same purpose and complete with each other. If one investment is undertaken, other will have to be excluded.

6.8 Importance of Capital Budgeting Capital budgeting decisions are of paramount importance in financial decision. So it needs special care on account of the following reasons:

1. Long-term Implications: A capital budgeting decision has its effect over a long time span and inevitably affects the company‟s future cost structure and growth. A wrong decision can prove disastrous for the long-term survival of firm. On the other hand, lack of investment in asset would influence the competitive position of the firm. So the capital budgeting decisions determine the future destiny of the company. Not only the present earnings of the firm are affected but the future growth and profitability also depend upon investment decisions taken today. So a bad decision today can lead to a downfall tomorrow.

2. Involvement of large amount of funds: Capital budgeting decisions need substantial amount of capital outlay. This underlines the need for thoughtful, wise and correct decisions as an incorrect decision would not only result in losses but also prevent the firm from earning profit from other investments which could not be undertaken. Capital Budgeting decisions usually involve large investments of funds but mostly there is a shortage of funds at every firm. Hence the funds and the resources need to be controlled by the firm. 41

3. Irreversible decisions: Capital budgeting decisions in most of the cases are irreversible because it is difficult to find a market for such assets.

4. Risk and uncertainty: Capital budgeting decision is surrounded by great number of uncertainties. Investment is present and investment is future. The future is uncertain and full of risks. Longer the period of project, greater may be the risk and uncertainty. The estimates about cost, revenues and profits may not come true.

5. Difficult to make: Capital budgeting decision making is a difficult and complicated exercise for the management. These decisions require an over all assessment of future events which are uncertain. It is really a marathon job to estimate the future benefits and cost correctly in quantitative terms subject to the uncertainties caused by economicpolitical social and technological factors.

6.9 Capital Budgeting Process Capital budgeting is a process that involves making of investment decisions by a company as to identify which project is profitable so that the company can invest its capital. The crux of capital budgeting is the allocation of available resources to various proposals. The crucial factor which influences the capital budgeting decision is the profitability of prospective investment. Hence capital budgeting decisions are very vital to any organization. It is a complex process as it involves decisions relating to the investment of current funds for the benefit to be achieved in the future but the future is always uncertain. The following procedure is adopted in process of Capital Budgeting. Capital Budgeting Process:-

1. 2. 3.

Identification of investment proposal. Screening the proposal. Evaluation of various proposals. 42

4. 5. 6. 7.

Fixing priorities. Final approval & preparation of capital expenditure budget. Implementing proposal. Performance review.

1. Identification of investment proposal:The capital budgeting process begins with the identification of investment proposal. The proposal or idea about potential investment opportunities may originate from the top of management or may come from the rank and file workers of any department or from any officers of the organization. The departmental head analyses the various proposals in the light of the corporate strategies and submits the suitable proposals to the capital expenditures planning committee in case of large organization or to the officers a concerned with the corporate strategies and submits the suitable proposals to the capital expenditures. Capital expenditures planning committee in the case of large organization or the officers concerned with the process of long-term investment decision.

2. Screening the proposal:The expenditures planning committee screens the various proposals received from different departments. The committee views these proposals from various angles to ensure that these are in accordance with the corporate strategies or selection criterion of the firm and also do not lead to the department imbalances.

3. Evaluation of various proposals:The next step in the capital budgeting process is to evaluate the profitability of various proposals. There are many methods which may be used for this purpose such as payback 43

period method, rate of return method, net present value method, internal rate of return, etc. All these method of evaluating profitability of capital investment proposals have been discussed in detail separately in the page of this chapter. It should be classified as below. i. Independent proposals. ii. Contingent or dependent proposals and iii. Mutually exclusive proposals.

4. Fixing priorities:After evaluating various proposals, the unprofitable proposals may be rejected straight away. But it may not be possible for the firm to invest immediately in the all the acceptable proposals due to limitation of funds. Hence, it is very essentials to rank the various proposals and to establish priorities after considering urgency, risk and profitability involved there in.

5. Final approval & preparation of capital expenditure budget:Proposals meeting the evaluation and other criteria are finally approved to be included in the capital expenditure budget. However, a proposal involving smaller investment may be decides at the lower levels for expenditure action. The capital expenditures a budget lays down the amount of the estimation expenditures to be incurred on fixed assets during the budget period.

6. Implementing proposals:Translating an investment proposal into a concrete project is a complex, time consuming, and risk- fraught task. 1. Adequate formulation of projects The major reason for delay is insinuate formulation of projects put differently, if necessary homework in terms of preliminary comprehensive and detailed formulation of the project. 44

2.

Use of the principle of responsibility accounting Assigning specific responsibility to project managers for completing the project within the defined time-frame and cost limits is helpful for expeditious execution and cost control.

3.

Use of Network Techniques

For project planning and control several network techniques like PERT (Programme Evaluation Review Techniques) and CPM (Critical Path Method) are available.

7. Performance Review:Performance review, or post – completion audit, is a feedback device. It is a means for comparing actual performance with projected performance. It may be conducted, most appropriately. When the operations of the project have stabilized. It is useful several ways. I. II. It throws light on how realistic were the assumptions underlying the project. It provided a documented log of experience that is highly valuable for decision making.

6.10 Capital budgeting techniques:

Capital Budgeting Techniques

DCF Criteria
Techniques of

Non – DCF Criteria

NPV

I.R.R.

P. I
45

Payback period

Accounting Rate of Return

selecting capital budgeting proposals:

Techniques grouped in the following two categories:

1. Time adjusted (Discounted Cash Flow Criteria-DCF) a) Net Present Value Method b) Internal Rate of Return Method c) Discounted payback period d) Profitability Index(PI) 2. Traditional (Non-Discounted Cash Flow Criteria) a) Average Rate of Return (ARR) b) Payback period (PB)

1. DISCOUNTED CASH FLOW CRITERIA

a) Net Present Value (NPV) Method:

The present value is the procedure recognizing the time value of money. Cash flow streams at different time periods differ in value and can be compared only when they are expressed in terms of a common denominator, i.e., present values. The formula for the net present value can be written as follows:

[

(

)

(

)

(

)

(

)

]

Where, C1, C2 ….represent net cash inflows in year 1, 2….., K is the opportunity cost of capital, C0 is the initial cost of the investment and N is the expected life of the investment. 46

The NPV Acceptance rules are: 1. Accept if NPV> 0 2. Reject if NPV< 0 3. May accept if NPV = 0

Example – Assume that project X costs Rs. 2500 now and is expected to generate yearend cash inflow of Rs. 900, Rs 800, Rs 700, Rs 600 and Rs 500 in years through. The opportunity costs of the capital may be assumed to be 10%. ) ( )

NPV = [Rs. 900 / (1+0.10) + Rs. 800 /( ) ]

NPV= [818+661+526+410+310]-2500 NPV= 2725 – 2500= 225 Here, cash inflows (Rs. 2725) are greater than that of cash outflow (Rs. 2500). Thus, it generates a positive net present value (NPV=+ Rs. 225). Therefore, it should be accepted.

Advantages:  Time value: It recognized the time value of money-a rupee received today is worth more than a rupee received tomorrow.  Measure of truth profitability.  Shareholder value: The NPV method is always consisted with objective of shareholder value maximization. Disadvantage:  Cash flow estimation: It is quite difficult to obtain estimates of cash flows due to uncertainty for NPV method.  Discount Rate: It is also very difficult in practice to measure the discount rate.  47

b) Internal Rate of Returns (IRR):

IRR is defined as the rate of discount at which the present value of cash inflow and present value of cash outflow are equal.

[

]

The internal rate of return is defined as the discount rate that gives a net present value (NPV) of zero. ( )

Where, PVCO PVCFAT R = Present value of cash outlay = Present value of cash inflows = Either of the two interest rates = Difference in interest rates = Difference in calculate present value of inflows.

IRR Acceptance Rule:  Accept the project when, r > k  Reject the project when, r < k  May accept the project when, r = k Where, r = internal rate of returns & k = required rate of return or cut off rate.

48

MERITS:    Time value of money. Profitability measure: it considers all cash flows over the entire life of the project to calculate its rate of return. Share holder value: It is consistent with the shareholder wealth maximization objectives.

DEMERITS:  Multiply rate: A project may have multiply rates, or it may not have a unique rate of return. Mutually Exclusive Projects: It may also fail to indicate a correct choice between multiply exclusive projects.

c) Profitability Index:

It is the ratio of the present value of cash inflows, at the required rate of return to the initial cash outflow of the investment. A profitability index number greater that 1 indicates an acceptable project, and is consistent with a net present value greater than 0. The profitability index approach measures the present value of return per rupee invested. The ratio is calculates as follows:

Rules for selection or rejection of a project: 1. If PI > 1 then accept the project 2. If PI > 1 then reject the project 49

3. May accept if PI = 1 The ratio is calculated as follows:

For Example, If the initial outlay of a project is Rs. 500 and Rs. 200 in year 1 – 4. We assume rate of discount as 10%. The PV of cash inflows at 10% discount rate is: Year 1 2 3 4 Inflows 400 300 500 200 10% DF .909 .826 .751 .683 PV 364 248 376 137

Total PV = 1125

2. Traditional / Non-Discounted Cash Flow Techniques:

a) Average Rate of Return:

The average rate of return (ARR) method is to measures the profitability of an investment. It is based upon accounting information rather than cash flows. The most common usage of average rate of return (ARR) expresses it as follows:

50

Where, The average profit after taxes are determined by adding up the after tax profits expected for each year of the project life and dividing the result by the no. of years. The average investment is determined by dividing the net investment by 2.

Accept Reject Rule: This method will accept all those project whose ARR is higher than the minimum rate established by the management and reject those projects which ARR less than the minimum rate.

For Example: If an investment proposal considering a cost of Rs. 50,000 having life expectancy of 5 years and no salvage value. Assuming the tax rate is 35% and the firm uses straight line depreciation. The estimated cash flow before depreciation & tax from the investment proposal are as follows: Year CFBT Depreciation PBT TAX (0.35%) 1 2 3 4 5 10000 10692 12769 13462 20358 10000 10000 10000 10000 10000 NIL 692 2769 3462 10385 NIL 242 969 1212 3635 NIL 450 1800 2250 6750 EAT

Total EAT (Earning After Tax) = 11250

= 9%

51

Advantages:    It selects alternative uses of fund. It considers saving over the entire life of the project. In addition to measuring the desirability of new investment on the basis of their relative cash flow, a comparison is made of expected profitability. This is done with the average rate of return, which is a ratio of the yearly average net earnings after depreciation and taxes to the average investment.

Disadvantage:   The differential timing of receipts is not considered It ignores the time value of funds.

b) Payback Period Method:

The pay period method is the 2nd traditional method of capital budgeting. It is simple and perhaps, the widely employed quantitative method for appraising capital expenditure decisions. It is defined as the number of years required. This method answers the question “How many years will it take for the cash benefits, to pay the original cost of an investment”. This method is also known as the pay – out method.

Advantages 1. It is an important guide to investment policy. 2. It lays a great emphasis on liquidity. 3. It is easy to understand, calculate and communicate to the other. 4. The method enables a firm to choose an investment which yields a quick return on cash funds. 52

5. It enables a firm to determine the period required to recover the original investment with some percentage return and thus arrive at the degree of risk associated with the investment. 6. The method is quite the simplest of all the techniques used by the industry. It helps in selection of those projects whose profits are high enough to reply the amount invested within a particular number of years. Disadvantages 1. The time value of money is ignored. 2. The rapidity of incoming cash flow is the only measure of desirability 3. There is no recognition of cash flow variation. One project may have cash inflow of Rs. 6000, for the first year, Rs. 8000 for the second year and Rs. 10000 for the third year. The second project may have cash flow of Rs. 10000 Rs. 8000 and Rs. 6000 for three respectively. If both the projects involved net cash outlays of Rs. 24000, the years paybacks period would yield more cash earlier and may, therefore, be considered more valuable. This situation is not properly handled under the payback method. 4. It does not indicate how to maximize value and ignores the relative profitability of the project. 5. It over emphasizes liquidity and ignores capital wastage and the wastage and the economic life of an asset. 6. It is only a rule – of – thumb method. It is often difficult to judge objectively whether one proposed project is superior to another and, if so, by how much. 7. It may choose highly risks project.

53

CHAPTER VI

DATA COLLECTION

54

1.Depreciation

Type % of depreciation Telecommunication Equipments 15.83 Electronic Items 11.31 Heavy Earth Moving Machineries(HEMMs) 41.28 Side Dump Loader (SDL) 19.00

As on 1.4.2010
300,000.00 250,000.00 200,000.00 150,000.00 100,000.00 50,000.00 0.00 As on 1.4.2010

Load Haul Dumper(LHD)

15.83

55

Telecommunication Eqipments 15.83 19.00 15.83 11.31 Electronic Items Heavy Earth Moving Machineries(HEMMs) 41.28 Side Dump Loader (SDL) Load Haul Dumper(LHD)

Balancesheet
Particulars A. Fixed Assets
Land Freehold Land Leasehold Building Plant & Machinery Office Equipment Railway Sidding Vehicles

As on 1.4.2010
19,151.83 2,594.67 58,828.98 257,299.42 4,236.66 3,001.30 5,050.20

56

20000 15000 10000 5000 0 -5000 -10000 -15000

Additions during the year Deductions & Adjustments

Particulars A. Fixed Assets
Land Freehold Land Leasehold Building Plant & Machinery Office Equipment Railway Sidding

Additions Deductions during & the year Adjustments
837.86 545.14 1,358.74 15,982.94 101.43 0 12,406.18 -12,406.18 49.33 5,391.98 0.47 0.00

57

Vehicles

10.65

70.01

Fixed Assets
300,000.00 250,000.00 200,000.00 150,000.00 100,000.00 50,000.00 0.00 60,138.39 7,583.5115,545.99 4,337.62 3,001.30 4,990.84 Fixed Assets 267,890.38

Particulars A. Fixed Assets
Land Freehold

Total as on 31/03/2011

7,583.51

58

Development
450,000.00 400,000.00 350,000.00 300,000.00 250,000.00 200,000.00 150,000.00 100,000.00 50,000.00 0.00 Prospecting & Boring Expenditure Nationaliasation Total

Development

Land Leasehold Building Plant & Machinery Office Equipment Railway Sidding Vehicles

15,545.99 60,138.39 267,890.38 4,337.62 3,001.30 4,990.84

Particulars As on 1.4.2010 B.Development
Prospecting & Boring 7,359.83

59

25000 20000 15000 10000 5000 0 -5000

Additions during the year Deductions & Adjustments

Expenditure Nationaliasation Total

55,298.03 906.56 413,727.48

60

Particulars B.Development
Prospecting & Boring Expenditure Nationaliasation Total

Additions during the year
129.86 2,274.71 0 21,241.33

Deductions & Adjustments
0 -0.24 0 5,511.55

Particulars Total as on 31/03/2011 B.Development
Prospecting & Boring Expenditure Nationaliasation Total 7,489.69 57,572.98 906.56 429,457.26

61

B.Development
450,000.00 400,000.00 350,000.00 300,000.00 250,000.00 B.Development 200,000.00 150,000.00 100,000.00 50,000.00 0.00 Prospecting & Boring Expenditure Nationaliasation Total 7,489.69 57,572.98 906.56 429,457.26

Particulars A. Fixed Assets B.Development
PREVIOUS YEAR(2009)

Additions Deductions As on during & Total as on 1.4.2010 the year Adjustments 31/03/2011

398,699.46

21,793.35

6,765.33

413,727.48

62

63

450000 400000 350000 300000 250000 200000 150000 100000 50000 0

398,699.46

413,727.48

21,793.35

6,765.33

PREVIOUS YEAR(2009)

64

A Fixed Assets & B.Development

65

450000 400000 350000 300000 250000 200000 150000 100000 50000 0 As on 1.4.2010 Additions during the year Deductions & Adjustments Total as on 31/03/2011

B.Capital Work In Progress(As On 1/4/2010)

66

As On 1/4/2010
30000 25000 20000 15000 10000 5000 0 As On 1/4/2010

67

B.Capital Work In Progress(Additions During the year)

14000 12000 10000 8000 6000 4000 2000 0

Additions during the year

Additions during the year

68

B.Capital Work In Progress(Deductions & Adjustments)

Deductions & Adjustments
4500 4000 3500 3000 2500 2000 1500 1000 500 0 -500

Deductions & Adjustmen ts

69

B.Capital Work In Progress

Total as on 31/03/2011
35000 30000 25000 20000 15000 10000 5000 0 Total as on 31/03/2011

70

Profit After Prior Period Adjustments

PAT
1200 1000 800 600 400 200 0 2006-07 2007-08 2008-09 2009-10 2010-11

PAT

71

72

CHAPTER- VIII
EVALUATION OF CAPITAL BUDGETING

8.1 CAPITAL BUDGETING PRACTICES IN WCL:

The long term investment decisions are in two categories:   With respect to capital expenditure With respect to project selection. 73

CAPITAL EXPENDITURE:

A capital budget or expenditure is the estimated amount required by the various department, project, and workshop, central and headquarters itself, for the purpose of utilizing the amount against the expenditure which are estimated in advance and are of capital expenditure in nature.

Capital budget or expenditure is controlled by the ministry of coal, where the proposed capital is sent for approval by the ministry. Based on the budgeted figure, capital expenditure is made. In WCL „CAPITAL BUDGET‟ is prepared which is a manual comprising of area wise projected Capital Expenditure, prepared firstly at area (LOCAL) level by the GM and AGM of concerned area then is sent to head quarters at project and planning department where these expected Capital Budget are compiled by the concerned officials in the same department.

Once the Capital Budget is complied & finalized, it is then issued as area book showing area wise estimated capital expenditure for each month. Our basis of these projected budgets, the monthly “Statement of Capital Outlay and expenditure of that respectively month along with comparing it with the budgeted expenditure.

Regarding the payment of this Capital Expenditure, this is mainly done in two levels or basis: 1. At Area Level: Area wise payment is done by the remittance received by the Center or Headquarter. The payments are made on the basis of release of funds from the headquarters as per the estimated and sanctions made thereof:

74

2. At Central or Headquarters Level: The payment is directly made from center headquarters for the HEMM. The Capital Budget depends either on project report or approved scheme. The total project evaluation is done by the CMPDI subsidiary company of the CIL, holding company of CLL. CMPDI prepares the detailed project report and send it to the CCL for approval after giving several presentations on some important feasibility aspects. WCL‟s board of directors can approve the project up to 500 crore and for projects costing more than 500 crore, the respected project has to be approved by the ministry of coal. As stated earlier, the capital expenditure statement are prepared at regional level and also at central level where based on the capital budget the estimated and actual are compared and percentage achievement are shown in the statement itself.

PROCEDURE FOR STARTING NEW PROJECT:

Starting a new project (mine) involved complex and elaborate procedure. These can be listed as below. 1. The area is earmarked and called as a ‗Block‘. For e.g. “Magadh”. Then the

area is drilled and coal reserve is proved. Geological Survey is done and raw data is made a available: Moisture, quality, etc. 2. Next step is to prepare a “Draft Project Report” which is done by Central Mine Planning and Design Institute (CMPDI) LTD. The draft report is then submitted to WCL headquarters, project & planning Department (P&P). Presentations are then given by CMPDI to the Head of Department (HOD) of all departments – Excavation, Mining, Finance, etc. As per suggestion, changes and amendment are made to the draft PR.

75

3. Empower Sub Committee (ESC) is prepared. It mostly consists of Functional Directors (FD‟s) and Independent Directors. Presentation are made to them suggestion (if any) incorporated.

4. The Draft PR is then sent to Board of Directors for approval (Up TO 500 crs). Up to 500 crores 500 crs. – 1000 crs. Above 1000 crs. : Approval by BOD, WCL : Approval by CIL : Approval by Ministry of Coal (MOC)

5. The DPR is then sent to ESC in Ministry of Coal for approval.

6. DRP is now sent to Public Investment Board (PIB) and the Draft PIB Note is prepared. The Secretary Expenditure again analyses the project and thereafter recommends the project for approval (if any).

7. Cabinet Committee on Economics Affairs (CCEA) the evaluate the project A Draft CCEF note is prepared.

8. The final stage is Approval of Project with / without condition (subject to Forestry Clearance). „Zero Date‟ of project if fixed.

PARALLEL ACTIVITY: ADVANCED ACTION

Advanced action consists of activities which are carried side by side while project is being studied and evaluated for approval. These activities include. I. II. Land Acquisition Forestry Clearance 76

III. IV. V.

PR Preparation Initial Infrastructure EMP Clearance

I.

LAND ACQUISITION:

Acquiring land for the mines in the primary activities which is carried out in advance by WCL. Land is acquired under various act by WCL, which are given are given below:

1. The coal bearing area (Acquisition and development) Act 1957. Government of India acquires the land then given it to WCL / CIL. This process known as „vesting‟. Government of India WCL / CIL Acquires Vesting Land

2. Land Acquisition Act Only non forest land can acquire under this act. All compensation, interest etc is paid by the state government 90% of land is acquired act.

3. Direct Purchase Under this land is acquired directly by CIL. These are only small portion of the purchase as per extra and emergency requirement of land.

II.

FOREST CLEARENCE Permission has to be obtained from forest department regarding acquiring of forest land for non-forest purpose i.e. the purpose of creating mines.

Section—II of the Forest Conservation Act, 1980 is applied to acquires forest land. It involves two stages: 77

1. Principally agree with / without condition.  Net present value of the land is calculated and the payment is made. 2. Final release of the land.

III.

EMP CLEARENCE

Environment Management Plan (EMP) is applied one month before the final release of the land by forest department. It analysis the effect of the project on the following aspects environment and its degradation.     Air Water Noises Land

1. At this EOR (Form -1) and Term of Reference (TOR) is prepared and submitted to the Ministry of Environment. The ministry analysis the application and then the project is finalized for approval. 2. Public Herring Minutes are given by the Population control Board. They give there suggestion on whether there should be any chance or on chance in the project. Change

MINUTES No change 78

Then presentations are given by expert committee mining i.e. EC (M) illustrating the project‟s:   Internal rate of return (IRR) – It should be at minimum 12%. Internal and extra budgetary resources (IEBR) – Gives the details of source of capital Investment i.e. whether the company has surplus money to fund this project or how the investment could be funded externally through Loans, Financial Institution etc. 

Variance Analysis

CCEA Note (Must)

One all the above activities are completed, the project could be started.

79

CHAPTER –IX

FINDINGS & CONCLUSIONS

9.1 FINDINGS & CONCLUSIONS:1. WCL is a government organization subsidiary of CIL where the Capital Expenditure upto 500 cr is approved at the WCL beyond this limit approved at CCL. 2. It is learnt that the projects are evaluated based on 12% IRR.

80

3. Company has 83 working mines. There are of 38 opencast, 43 are undergrounds, 2 are mixed (OP+U/G). 4. The machinery required is mostly HEMM, Draglines, Dumpers and Dozers, Shovels, Drills. 5. Utilization of resources is extremely good at about above 100% based on standards.
6. Depreciation on assets has been calculated by straight-line method depending

on the life of equipments. 7. The profitability of WCL is improving over a period.

CHAPTER –X

81

RECOMMENDATIONS

10.1 RECOMMENDATIONS:1. There is a burocrasy system. Systems are very slow. 2. There is hierchy and approval takes very long time. 3. The methods of Capital Budgeting may be utilizes in an effective way.

82

83

CHAPTER –XI

LIMITATIONS

11.1 LIMITATIONS OF THE STUDY:-

Though the project is completed successfully a few limitations may be there.

1. Coal India ltd. accounts for 90% of the coal production in India. It has complete monopoly in the coal sector. Therefore, the data used for this study are confined to CIL and not applicable to any other company. 84

2. Assumptions have been taken regarding analysis and interpretations of project due to lack of proper data. 3. Certain data and information given in the research are hypothesized due to highly confidential of such information. 4. Since the procedure and polices of the company will not allow to disclose confidential financial information, the project has to be completed with the available data given to me. 5. The period of study that is 9 weeks is not enough to conduct detailed study of the project. 6. The study is carried down on base the information and documents provided by the organization and based on the interaction with the various employees of the respective departments. 7. Due to the large size of the organization and busy schedule of the staff there was a little scope for frequent interaction with the guide and concerned people. 8. Capital Budgeting Methods NPV, IRR, PI, ARR, Payback Period could not be directly employed in the organization.

85

CHAPTER- XII BIBLIOGRAPHY

12.1 BIBLIOGRAPHY:

A.TEXT BOOK:
86

Financial Management

-

I. M. Pandey

Financial Management

-

Prasanna Chandra

Financial Management

-

M. Y. Khan & Jain

Financial Management

-

R. P. Rustagi

WCL profile & Annual Reports

B.WEBSITES:

www.westerncoal.nic

www.google.com

www.wikipedia.com

87