CHAPTER -- 1

1
COAL INDUSTRY IN INDIA- A REVIEW

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 Non-
Coking 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. Central Division of CMAL was known as Central Coalfields Limited
(CCL).

CCL was again re-organized in the year 1986 and two separate companies known
as Northern Coalfields Limited and Mahanadi Coalfields Limited came into
existence. 
           

2
 Coal India Limited –A PROFILE

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

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 Tonnes (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 Lakh persons and is the
largest corporate employer in the country. It is one of the largest Companies in the
country, turnover 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
Billion to the Govt. of India in 2007-08.

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.

3
Coal India Limited was formed on 21st October, 1975 as a holding company with five
subsidiaries:

 Bharat Coking Coal Limited (BCCL),- Dhanbad

 Central Coalfields Limited (CCL), -Ranchi
 Western Coalfields Limited (WCL),- Nagpur region
 Eastern Coalfields Limited (ECL),- Asansol
 Central Mine Planning and Design Institute Limited (CMPDIL), -Ranchi

Several years later, FOUR more subsidiaries were added:

 Mahanadi Coalfields Limited (MCL), -Raulkela

 South Eastern Coalfields Limited (SECL), -Bilaspur
 North Eastern Coalfields Limited (NECL), -directly under control of coal India
limited
 Northern Coalfields Limited, Singrauli (NCL), -Singrauli

The performance evaluation is based on its annual performance.

PERFORMANCE RATING:
The performance rating is done in the following way:

 5% more than the target -- Excellent

 Equal to the target -- Very Good
 5% less than the target -- Good
 10% less than the target -- Fair
 15% less than the target -- Poor

CIL Board has the following members:

 Chairman CIL
 Functional Director
 Additional Secretary, MCC
 Joint Secretary & Financial Advisor, MOC
 Representative from Railway Board
 Two CMDs of subsidiary company

4
 CENTRAL COALFIELDS LIMITED (CCL),
RANCHI, JHARKHAND
Introduction Of CCL:
Central Coalfields Limited (CCL) is a subsidiary of Coal India Limited (CIL) a
Government of India undertaking. CCL managing the nationalized coal mines of Central
division of Coal Mines Authority. CCL Notified as a Mini Ratna status in 2007. Its
Registered and Corporate office is "Darbhanga House", Ranchi, Jharkhand.

Presently CCL has:

Number of 63 Mines
Mines (26 Underground & 37 Opencast mines)
Washeries 7 Washeries
4 Medium Coking Coal Washeries
3 Non-Coking Coal Washeries
Workshop 1 Central Workshop,5 Regional Workshop
(The Central W/S & 3 Regional W/S are ISO
9001)
Operating 6 (East Bokaro, West Bokaro, North
Coalfields  Karanpura , South Karanpura, Ramgarh &
Giridih)

Coal Reserves (up to 600 meter)

Medium Coking Coal  14.023 B.T.

Non-Coking Coal 19.539 B.T.
Total Reserve 33.562 B.T.
Proved 16.006 B.T.
(48% of total
reserve)

5
CCL is having 940 cr. Issued capital. Its main functions are PRODUCTION and SALE of
coal.Approx 90% of the total coal is sold on credit basis mainly to the public sector units,
such as PSEB, HSEB, DVC, NTPC, JSEB, UPRVUNL, TVNL, SAIL etc. and remaining
10% on cash basis mainly to private sector units.

CCL has played a major role in socio-economic growth of Jharkhand region. In 47 years
of its existence it has virtually brought out development in many backward areas through
its mining activities, employment opportunities and reaching basic infrastructure to
several remote and inaccessible areas. CCL also strive to help in establishing Coal based
industries in this region and also to reach coal as domestic fuel to homes with an
objective of improving forest cover.

MAJOR CONSUMERS OF CCL

A. Power Houses :
 Jharkhand State Electricity Board
 Bihar State Electricity Board
 Damodar Valley Corporation
 N.T.P.C.
 P.S.E.B.
 G.S.E.B.
 Delhi Vidyut Board
B. Steel Plants:
 SAIL
 VIZAG Steel
 TISCO

C. Railways
D. Government Parties:
 Defence
 H.E.C.
 Fertilizers
 B.H.E.L.

6
E. Private Parties:
 Lemo Cement Company
 Indian Aluminium Company Ltd.
 Tata Sponge Iron Ltd.
 National Fertilizer Limited, etc.

Coal Types :
Chemically ‘Coal’ is made of carbon, hydrogen, oxygen, nitrogen and some other
impurities. The main constitutes of coal are:

Carboneous Non- Carboneous

Vitarin Ash
Clarin Moisture
Volatile matter
Fixed Carbon

Basically Coals are Four types:

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

CCL 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 be converted 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.

7
 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 overburden (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 overburden remains intact and the workers dig the ground.

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

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.

8
 VISION & MISSION OF CCL

VISION:

"Committed to create eco-friendly mining"

 The Mission of CCL is to produce and market the planned quantity of coal and
coal products efficiently and economically with due regard to safety, conservation
and quality.
 

 The main thrust of CCL in the present context is to orient its operations towards
market requirements maintaining at the same time financial viability to meet the
resource needs.
 

MISSION:

"To become a World class, Innovative, Competitive & Profitable

Coal Mining Operation to achieve Customer Satisfaction
as top priority."

9
 MAIN OBJECTIVE OF CCL:

1. Coal mining through efficiently operated mines.

2. Besides fulfilling coal needs of the customer in terms of quantity, focus on quality,
value addition and beneficiation to the satisfaction of the customers.

3. Marketing of coal as main product.

4. To optimize generation of internal resources by improving productivity, preventing

wastage and to mobilize adequate external resources for meeting investment needs.

5. To maintain high standards of safety for accident free coal mining through safe
mining practices and continuous safety audit and risk assessment.

6. To conserve environment through of committed plan for reclamation and

plantation.

7. To introduce mass production technology like continuous miners etc. for enhancing
underground production of quality coal.

8. To operate mega opencast projects using capacity equipment with higher

availability and utilization.

9. Exploration and prospecting.

10. Policy formulation and advisory function.

11. Secured through long term Maintenance And Repair Contract (MARC).

12. To beneficiate coal on a substantially larger scale by adding new capacities and
supplying quality coal as per customer’s choice.

13. To provide adequate number of skilled manpower to run the operations and impart
technical and managerial training for upgradation of skill.

14. To create an enabling environment for full realization of employee’s potential

through mindset change, customized HRD programmes and synergic trams.

10
ROLE OF CCL

1. To get implemented the policy and program laid down by the Govt. of India. CIL
ensures working in accordance with the guidelines and directions issued by
them from time to time.

2. To keep them informed of the program to implementation of their policies and

progress in accordance with the guideline and direction issued by them.

3. To plan and carryout all operations in such a manner that there is no risk of loss,
injury or damage to the health of workman.

4. To take care of housing, water supply, recreational, educational, medical and

other facilities for the social security of employees to the extent it is reasonable
and practicable.

5. To draw annual plans for production, preparations and dispatch of coal connect
activities keeping in priority wise demand.

6. To maintain store of equipment spares and others materials to that necessary items
are available in time without unduly blocking capital for purpose.

7. To install, maintain and operate plant and machinery properly so that they are
available for working to the maximum extent and to utilize them in the best
possible manner.

8. To arrange necessary fund and utilize that in the most favorable manner.

9. To maintain harmonious industrial relation.

11
 10. To construct new projects to meet the future requirements and to ensure
timely communication and completion of jobs.

11. To adopt techniques and methods of working such that loss by ways
similar to others reasons and blockages of reserved in barriers etc.

12. To keep down cost in all possible ways so as to get maximum profit.

ORAGANISATIONAL STRUCTURE :

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FINANCIAL HIGHLIGHTS OF CCL

PROFIT & LOSS ACCOUNT FOR THE YEAR ENDING 31ST MARCH, 2010
FOR THE YEAR
ENDED
Schedul FOR THE YEAR ENDED 31.3.2009 (Rs.
e 31.3.2010 (Rs. In Lakh) In Lakh)

INCOME :
Sales 1 548822.42 521088.78
Coal issued for other purposes 2(A) 109313.21 103844.53
Accretion/Decretion in stock 3 16243.95 -6993.82
Other Income 4 50585.90 46457.60
TOTAL INCOME     724965.48   664397.09
EXPENDITURE :
Colliery consumption 2(B) 105315.47 102017.24
Consumption of Stores & Spares 5 50297.13 47980.00
Employees Remuneration & Benefits 6 232875.99 258928.00
Social Overhead 7 20292.92 19300.53
Power & Fuel 8 26689.97 25628.66
Repairs 9 19574.04 17378.46
Contractual Expenses 10 29276.90 31899.17
Miscellaneous Expenses 11 33608.73 37535.06

13
 Overburden Removal Adjustment 18502.34 7198.27
TOTAL EXPENDITURE     536433.49   547865.39
GROSS OPERATING PROFIT 188531.99 116531.70
Interest 12(A) 1738.80 4351.05
Financial Charges 12(B) 185.84 330.60
Depreciation 20202.27 19005.30
Provisions 13(A) 12707.82 18511.96
Write-Off 13(B) 498.67 81.52
PROFIT FOR THE YEAR     153198.59   74251.27
Prior Period Adjustment(Credit) 14 106.42 2129.12

PROFIT BEFORE TAX     153305.01   76380.39

PROVISION FOR INCOME TAX 50659.06 48341.00
PROVISION FOR DEFERRED TAX 5771.56 -22142.64
FRINGE BENEFIT TAX 0.00 1189.12
Provision for IT for earlier year 295.52 0.00
PROFIT AFTER TAX 96578.87 48992.91
APPROPRIATION
General Reserve 15331.00 7974.00
CSR Reserve 2161.80 0.00
Proposed Dividend 38632.00 19597.00
Tax on Dividend 6565.51 3330.51
PROFIT UPTO THE PREVIOUS YEAR 80128.60 62037.20
BALANCE CARRIED TO BALANCE SHEET     114017.16   80128.60

BALANCE SHEET AS AT 31ST MARCH, 2010

As at 31.3.2010 As at 31.3.2009
Schedule (Rs. In Lakh) (Rs. In Lakh)
I. SOURCES OF FUNDS :
1 Share Holders' Funds :
(a) Share Capital A 94000.00 94000.00
(b) Reserve & Surplus C 172063.96 120682.82
266063.9
6 214682.82
2 Loan Funds :
(a) Secured 0.00 0.00
(b) Unsecured E 11205.41 29397.58
11205.41 29397.58
277269.3
TOTAL 244080.40
7

II. APPLICATIONS OF FUNDS :

1 Fixed Assets :
(a) Gross Block F 465900.25 448490.81

14
 Less : Depreciation 314281.44 303800.93
151618.8
Net Block 1 144689.88
(b) Capital Work in Progress (Net) G 34304.70 31135.31
185923.5
1 175825.19
2 Investments H 5653.82 6596.12
3 Deferred Tax Assets 50727.97 56499.53
4 Current Assets, Loans & Advances :
(a) Inventories I 117717.53 96806.32
(b) Debtors J 51244.83 74526.48
( c) Cash &Bank Balances K 260700.75 181588.39
(d) Loans & Advances L 120898.32 262270.48
(e) Other Current Assets M 16082.32 11821.78
566643.7
Total Current Assets, Loans & Advances 5 627013.45
531679.6
Less : Current Liabilities & Provisions N 8 621854.11
Net Current Assets 34964.07 5159.34
   
277269.3
TOTAL 7 244080.18

SIGNIFICANT ACCOUNTING POLICY P

NOTES ON ACCOUNTS Q
BALANCE SHEET ABSTRACT AND
COMPANY'S GENERAL
BUSINESS PROFILE R
CASH FLOW STATEMENT S

SWOT ANALYSIS OF CCL

STRENGTHS:

 CCL enjoy monopoly in coal production.

 CCL has a skilled and experienced manpower to assist in coal production.

 CCL has got constant Government support and assistance as it is a company with
Govt. undertaking.

15
  Availability of good infrastructure.

 Experience of Coal production for 34 years.

 Use of heavy machineries (HEMM) and advance technology in coal mining.

WEAKNESS:

 CCL has to suffer due to interference by Government.

 It has heavy bureaucracy and red-tapism.

 Attitude of manpower is negative and less motivated.

 Lack of leadership quality in employees.

OPPORTUNITY:

 CCL has long-term business opportunity in coal production.

 Availability of experienced manpower for the company.

 CCL is planning to expand its operations globally by investing in foreign

projects.

 CCL can look forward to provide better services to its clients.

16
THREATS:

 CCL may face intense competition in future due to emergence of private

companies in coal productions.

 CCL might have reduced profit and sales as a result of lack of product
innovation.

 The company may have to encounter tough challenges due to privatization of

coal sector.

OBJECTIVES, SCOPE & LIMITATIONS OF THE STUDY

Objectives of the study:

 To study and understand the current trend, procedures & implementations of

capital budgeting techniques at CCL.

 To analyze the tools and techniques used in preparing capital budget.

 To understand the nature of capital expenditures.

17
 To estimate the total capital expenditure requirements for projects.

 To approximate & establish the sources of capital to fund these projects.

SCOPE OF THE STUDY:-

 This research project aims at studying and analyzing the current practices of
capital budgeting at central coal field ltd (CCL).

 The research project would help CCL to implement new and better techniques of
capital budgeting while evaluating new projects i.e. acquiring new coal mines.

 This study would help CCL to find out various ways to fulfill the capital
requirements of the company.

 IT would help the company to improve the profitability of their projects.

 This study is carried out using actual data and information provided by various
sources at CCL. 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).

LIMITATIONS OF THE STUDY:--

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.

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.
.

18
19
 CHAPTER -- 2

Introduction Of Capital Budgeting

Capital Budgeting

An efficient allocation of capital is the most important finance function in the modern
times.

The investment decision of a firm are generally known as the capital budgeting, or
capital expenditure decisions.

A capital expenditure is an outlay of cash for a project that is expected to produce a cash
inflow over a period of time exceeding one year. Capital budgeting consists in planning
the deployment of available capital for the purpose of maximizing the long-term
profitability (return on investment) of a firm.

20
It is a process of evaluating and selecting long-term investment that is consist with the
goal of share holders wealth maximization. The firm’s investment decisions would
generally include expansion, acquisition, modernization and replacement of the long term
assets.

Capital budgeting may be defined as the decision making process by which a firm
evaluates the purchase of major fixed assets, including buildings, machinery and
equipment.

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.

Importance of Investment Decisions

Investment decisions require because of the following reasons:

 They influence the firm’s growth in the long run.

 They affect the risk of the firm.
 They involve commitment of large amount of funds.
 They are irreversible, or reversible at substantial loss.
 They are among the most difficult decision to make.

Types of Investment decisions

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

21
 Yet another useful way to classify investment is as follows:
 Mutually exclusive investments
 Independent investments
 Contingent investments.

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.

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 than input
In this all independent project are accepted. Independent project are those which is
not compete with others.

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 serve the same purpose and compete with each
other.

22
 If one investment is undertaken, other will have to be excluded.

Techniques of 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)

DISCOUNTED CASH FLOW CRITERIA

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:

NPV =¿C0

Where,

23
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

The NPV Acceptance rules are:

1. Accept if NPV>0
2. Reject if NPV<0
3. May accept if NPV=0

Examples- assume that project X costs Rs.2500 now and is expected to generate year end
cash inflow of Rs. 900, Rs 800, Rs 700, Rs 600 and Rs. 500 in years through. The
opportunity cost of the capital may be assumed to be 10 %.

NPV=[Rs.900/(1+0.10)+Rs.800/(1+0.10) 2+Rs.700/(1+0.10)3+Rs.600/(1+0.10)4+Rs
.500/(1+0.10)5]-2500

NPV=[818+661+526+410+310]-2500

NPV=2725-2500=Rs225

Here, cash inflow (Rs.2725) is 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 recognises the time value of money-a rupee received today is
worth more than a rupee received tomorrow.

 Measure of true profitability

 Shareholder value: The NPV method is always consisted with the objective
of shareholder value maximisation.

Disadvantages:

 Cash flow estimation: It is quite difficult to obtain the estimates of cash flows
due to uncertainty for NPV method.

24
 Discount rate: It is also very difficult in practice to measure the discount rate.

Internal Rate of Return (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.
¿
n

∑ Ct
¿¿ ¿
t =1

The internal rate of return is defined as the discount rate that gives a net present value
(NPV) of zero.
IR R=r−¿ ¿
Where,
PVCO = Present value of cash outlay

25
PVCFAT = Present value of cash inflows
r = Either of the two interest rates
∆r = Difference in interest rates
∆PV = Difference in calculated present values 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 return &

k = required rate of return or cut off rate.

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 holdes value: It is consistent with the shareholders wealth maximization
objective.

DEMERITS:
 Multiple rates: A project may have multiple rates, or it may not have a unique rate
of return.

Mutually Exclusive projects: It may also fails to indicate a correct choice between a
mutually exclusive projects.

26
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 than 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 returns per rupee
invested.

The ratio is calculated 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

(3) May accept if PI=1

27
 The ratio is calculated as follows :

For example,
If the initial outlay of a project is Rs.1000 and it can generate cash inflow of Rs.400,
Rs.300, 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 Inflows 10% df PV

1 400 .909 364
2 300 .826 248
3 500 .751 376

4 200 .683 137

Total PV = 1125
1125
PI = = 1.125
1000

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 Traditional/ Non-Discounted Cash Flow techniques:

Average Rate of Return:

The average rate of return (ARR) method is to measure 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:

Average Earning After Tax

ARR = × 100
Average Investment

Where,
The Average Profit After Taxes are determined by adding up the after tax profits expected
for each year of the projects life and dividing the results by the no. of years.
The average investment is determined by dividing the net investment by 2.

29
Accept reject rule: this method will accept all those projects whose ARR is higher than the
minimum rate established by the management and reject those projects which have 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 sulvage value. Assumingthe 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 EAT

(0.35%)
1 10,000 10,000 Nil Nil Nil
2 10,692 10,000 692 242 450
3 12,769 10,000 2769 969 1800
4 13,462 10,000 3462 1212 2250
5 20,385 10,000 10,385 3635 6750

Total EAT (Earning After Tax) =11250

Average Earning After Tax

ARR = Average Investment
×100

11250 ÷ 5
¿ ×100
50,000÷ 2
¿9%

Advantages:
 It selects alternative uses of fund.

30
  It considers saving over the entire life of the project.
 In addition to measuring the desirability of new investments 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.

Disadvantages
 The differential timing of receipts is not considered
 It ignores the time value of funds

Payback Period Method:

The pay period method is the 2nd traditional method of capital budgeting. It is the simple
and perhaps, the most 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.

Initial Investment
Payback period = Net annual cash flow

For Example:
If a project requires an outlay of Rs. 50,000 and yields annual cash inflow of Rs. 12,500
for 7 years. The payback period for the project is:

Rs .50,000
PB = Rs .12,500 = 4 years

31
 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.
(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) It emphasizes the liquidity and solvency of a firm, which is undoubtedly an
important consideration.
(7) It weighs early returns heavily and ignores distant returns.
(8) When the payback index is used for ranking competitive projects, it has the
advantage of eliminating any bias due to project size in terms of cost.
(9) 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 repay 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.6,000 for the first year, Rs.8,000 for the second year and Rs.10,000 for the
third year. The second project may have cash flow of Rs.10,000 Rs.8,000 and
Rs.6,000 for three years respectively. If both the projects involved net cash
outlays of Rs.24,000, the payback period would be three years of each. It should
be remembered, however, that the second project 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 maximise value and ignores the relative profitability of
the project.
(5) It over emphasises liquidity and ignores capital 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) No allowance is made for taxation nor is any capital allowance made.
(8) It may choose highly risky project.

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CHAPTER -- 3
33
 CAPITAL BUDGETING PRACTICES IN CCL:

The long term investment decisions are done in two categories :

 With respect to capital expenditure

 With respect to project selection.

CAPITAL EXPENDITURE:

A Capital budget or expenditure is the estimated amount required by the various

departments, projects, workshops, central stores 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 budget is sent for approval by the ministry. Based on the budgeted figure, capital
expenditure is made.

34
 In CCL ‘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 and then is sent to the head quarters at project and planning department
where these expected Capital budgets are compiled by the concerned officials in the same
departments.

Once the Capital Budget is compiled & finalized, it is then issued as a year book showing
area wise estimated capital expenditure for each month. On the basis of these projected
budgets, the monthly” ‘Statement of Capital Outlay and expenditure’ is prepared for each
area showing the progressive expenditure of that respective month along with comparing
it with the budgeted expenditure .

Regarding the payments 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 Centre or Headquarter. The
payments are made on the basis of release of funds from the headquarters as per the
estimations and sanctions made thereof .

2. At Central or Headquarters level:

The payment is directly made from centre or headquarters for the HEMM and central
stores at Barkakhana.

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 CCL. CMPDI prepares the detailed project report and sends it to the
CCL for approval after giving several presentations on some important feasibility
aspects. CCL’s board of directors can directly 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 .

35
As stated earlier, the capital expenditure statements 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 A NEW PROJECT

Starting a new project (mine) involves complex and elaborate procedure. These can be
listed as below:

Step: 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 available: Moisture, quality, etc.

Step: 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 CCL Headquarters, project & planning Department (P&P).
Presentations are then given by CMPDI to the Head Of Departments (HOD) of
all departments –Excavation, Mining, Finance, etc. As per suggestion, changes
and amendments are made to the draft PR.

Step: 3 Empower Sub Committee (ESC) is prepared. It mostly consists of Functional

Directors (FD’s) and Independent Directors. Presentations are made to them
and suggestions (if any) are incorporated.

Step: 4 The Draft PR is then sent to Board Of Directors for approval (up to 500crs).

36
 Upto 500 Crores : Approval by BOD,CCL
500 Crs. – 1000 Crs. : Approval by CIL
Above 1000 Crs. : Approval by Ministry Of Coal (MoC)

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

Step: 6 DPR 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).

Step: 7 Cabinet Committee on Economic Affairs (CCEA) then evaluates the project.
A Draft CCEA note is prepared.

Step: 8 The final stage is Approval of Project with / without conditions (subject to
Forestry Clearence) . ‘Zero Date’ of the project if fixed.

PARALLEL ACTIVITY: ADVANCED ACTION

Advance action consist of activities which are carried side by side while the project is
being studied and evaluated for approval. These activities include:

i. Land Acquisition
ii. Forestry Clearance
iii. PR Preparation
iv. Initial Infrastructure
v. EMP Clearance

LAND ACQUISITAION:
Acquiring land for the mines in the primary activity which is carried out in advance
by ccl.
Land is acquired under various act by CCL, which are given below:
(1) The coal bearing area (acquisistion and development)Act 1957.
Government of india acquires the land then given it to ccl/ail. This process is
known as ‘vesting’

37
GOVT OF INDIA Acquires land

CCL / CIL Vesting

(2) Land Acquition Act

Only non forest land can acquired under this act. All compensation , interest etc is
paid by the state government90% of land is acquired by land acquisition 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.

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

Sections—II of the Forest Conservation Act, 1980 is applied to acquire forest

land .It involves two stages:
STAGE 1: Principally agree with/without conditions.
Net present value of the land is calculated and the payment is made.
STAGE 2: Final release of the land.

EMP CLEARENCE

Environmental Management Plan(EMP) is applied one month before the final

release of land by forest department.
It analyses the effect of the project on the following aspects environment and its
degradation:
 Air
 Water

38
  Noises
 Land

Stage1: At this stage EOR(form-1)and the 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.
Stage2: Public Hearing
Minutes are given by The Population control Board. They give there
suggestion on whether there should be any chance or no chance in the project.

Change
MINUTES
MINUT
N No Change
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

sources 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 Institutions etc

 Variance Analysis

 CCEA Note (Must)

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

39
 Projects commissioned during the tenth Plan Period (2002-2007)

Proposed Approval Govt’s approval/Present status

Sl.No. Name of Capacity Capital Outlay from CCL
Project (MTY) (Rs. Cr.) board

Approved by govt.
1 Magadh 12.00 469.78 Feb’2003 Vide letter dated 19.07.06 from MOC.
OCP Project is under implementation.

Approved by Govt. vide letter dated

2 Ashok 6.50 471.66 June’03 13.04.06 from MOC.
Expn. OCP Project is under implementation.
Approved by CCL Board on 12.08.06.
3 Konar OCP 3.50 74.53 April’04 (As per revised Delegation of power
of CCL Board)

Approved by CCL Board on 12.08.06.

4 Karo OCP 3.50 96.53 July’05 (As per revised Delegation of power
of CCL Board)
Approved by CIL Board on 06.03.02.
5 Topa RO 1.20 65.25 - Project is under implementation.
CCEA note submitted to MoC on
6 Amrapali 12.00 517.62 Feb’03 06.11.06
OCP
Approved by CCL board on 07.12.07

40
7 North 3.00 179.87 May’04 (as per Revised Delegation of Power
Urimari of CCL board)
OCP
Approved by CIL Board on 27.08.07.
8 Churi Benti 0.81 163.51 April’07 Project is under implementation
UGP

The above 8 mining projects have been commissioned during X Plan period. The total
capacity of these projects is 42.51 MTY. Out of this Topa RO OCP was sanctioned in
2002. Magadh, Ashok EPR (6.5 MTY), Karo OCP and Konar OCP have been sanctioned
in 2007-08. Piparwar Expn.(10 MTY) and Ashok Expn (10 MTY) have been approved
under Emergency Coal Production Programme. Amrapali OCP is at CCEA for its
approval.
Major Projects of CCL
Piparwar OCP (6.50 MTY)
KDH Hesalong OCP (4.50 MTY)
Rajrappa OCP (3.00 MTY)
Parej (E) OCP (1.75 MTY)
Urimari OCP (1.30 MTY)
Sel. Dhori OCP (2.25 MTY)
Jharkhand OCP (1.00 MTY)

Future Projects
Topa OCP (1.20 MTY)
Ashok Expansion OCP (6.50 MTY)
Kora Expansion OCP (3.50 MTY)
Konar OCP (3.50 MTY)
N. Urimari OCP (3.00 MTY)
Purnadih OCP (2.00 MTY)

Mega Project of 10th plan

Magadh OCP (12.0” ) Linked to NKTPS
Amrapali OCP (12.0” ) Linked to Barha TPS
41
Strategy for financing or future project
 Internal Generation
 External funding through Financial Institutions
 Bill of Transfer

CHAPTER -- 4
42
 Research Methodology

Methodology used in the study:

For carrying out this study, a lot of efforts have been made. Through
this type of vast organisation 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
methods to achieve these objectives of the study.

Primary Data
1. Personal meeting with senior finance executives.

Secondary Data
1. Analysis of past financial statement.
2. Data collected from various magazines and internet.

Personal meeting with senior executives:

43
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 the top officers, senior executives of the finance and
administration department. Thanx toall those managers and executives
whom I wished to talked and talked. They cooperated with necessary data
and talked very freely with me. We talked about past data, present scenario
and even predicted about the future.

Analysis of Past Records:

Records of last years of trading and profit and loss accounts, balance sheet
and cash flow statements of CCl are collected.

Limitation:
Primary and secondary data has been collected from various resources but it
was not easy to collect all the data due to safety reason and security
concerns. That is why some problem had come in collecting data. I have
tried my best for collecting data.

44
CHAPTER -- 5
45
 DETAIL EVALUATION OF A PROJECT

Economic Evaluation

Economic evaluation for the project has been provided in 2 parts:

A) Mine Economics
B) Integrated Economics for mining and coal washery

A) Mine Economics

Initial Capital investment :

In the two options Department and Outsourcing options, Department option has been
considered for operating this project. In department option it has been proposed to
operate the mine with departmental resources except for hiring of vehicles have been
proposed.

Total initial capital investment (till target in 5 th year) for the project has been estimated
as Rs.1071.73 crores.

46
 The capital investment of the project is estimated on the basis of 1.5: 1- Loan: Equity
Ratio. 
 

Methods of Estimation of Capital Cost:

The estimates for the capital cost of HEMM and other P&M are based mainly on
cost of mining equipment in Dec. 2008 ( as per CMPDI’s Standard Price List for
Mining & Equipment). For civil estimates Building Cost Index for the area has been
taken as 1776 with respect to 100 base at Delhi as on 1.10.76.
First two years are considered as construction period (year 1 to year 2). During year
3, there is a cash surplus. Hence, the revenue expenses for the first two years (year 1
& Year 2) have been capitalized.

Estimates of Operating Cost

The details of estimated operating cost are given for 100% capacity utilization. The
average cost of production, for 25 years of life of mine, at 100% of capacity
utilization is given below:

Particulars Departmental Option

At 100% 935.27

Salary and Wages

The peak requirements of manpower for an annual output of 4.00 Mty of coal for
Departmental Option is as 1044.

47
Year wise salary & wages cost upto 25th year of operations are given .
The salary & wages cost for Departmental Option has been estimated as Rs. 97.55/t at
100% capacity utilization.

Stores Cost:

Year wise stores cost consists of repairs & maintenance, diesel, lubricant, explosives,
and other details up to 25th year of operations.
The stores cost for Departmental Option has been estimated as Rs.307.55/t at 100%
capacity utilization.

Power cost:
In Departmental Option power supply arrangements to various locations will be the
responsibility of company.
Year wise power bill is calculated for the project.
The power cost for departmental option and has been estimated as Rs.16.97/t at 100%
capacity utilization.

Miscellaneous expenses:
This covers the expenses on TA/DA, printing and stationary, postage, telephones,
repairs, and maintenance of civil items, workshop debit for annual servicing and
overhandling of HEMM, insurance and taxes for vehicles, environment management
cost including mine closure, social welfare, security outsourcing cost, vehicle hiring
cost etc.
The miscellaneous expenses have been estimated as Rs. 58.94/t at 100% capacity
utilization.

Administrative charges:

48
This includes area overhead and apex overhead etc. In the departmental option
company authorities will be supervising all the mining related activities.
So the administrative expenses for departmental option has been estimated as Rs.
58.63/t at 100% capacity utilization.

Interest on working capital:

The rate of interest on working capital is taken as 12.5% per annum and the quantum
of working capital has been assumed as equivalent to four(4) months of cash operating
cost.

Interest on loan capital:

The rate of interest on loan capital is taken as 12.5% per annum.

Depreciation
Depreciation on assets has been calculated by straight-line method depending on the
life of equipments.

Outsourcing cost:
The basic rate has been envisaged assuming following main activities to be done by
the agency.
 Ground preparation
 Approach road and haul road preparation
 Drilling and blasting under departmental supervision(explosives will be made
available on chargeable basis)
 Excavation, loading and transportation of coal to CHP.
 Dumping, dozing and leveling of overburden at dumping site.
 Pumping and drainage operation
 Coal crushing
 Workshop for HEMM in coal and overburden
 Water spraying on haul roads, mine faces and overburden dumps to control dust
generation
 Reclamation activities

49
  Power-supply arrangements from the main-substation to the respective locations
i.e. quarry illumination, pumping, CHP and workshop etc.

Selling price
Selling price of jhama coal and washery grade 4 coal has been considered as Rs.2100/t
as per the information furnished by the company.

50