PROJECT REPORT ON

CAPITAL BUDGETING TOOLS

AT CMPDI

GUIDED BY:

MR. KINTALI NAVEEN SUBMITTED BY:

HEEMA KUMARI

ROLL NO: CUJ/I/2012/IMBA/11

CENTRAL UNIVERSITY OF JHARKHAND

DECLARATION

I hereby declare that this project report prepared in lieu of a compulsory paper for the partial fulfillment of Integrated Master in business administration is my original work which I have submitted in Central Mine Planning and Designing Institute to my guide Mr. Kintali Naveen

No part of it has been submitted to any other university or organization.

All the information and data in my project are authentic to the best of my knowledge and taken from reliable sources.

HEEMA KUMARI

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CERTIFICATE OF COMPLETION

This is to certify that the project called Capital Budgeting Tool At CMPDI “A case study of CMPDI” submitted by Heema Kumari for the partial fulfillment of the requirement of the IMBA, embodies the bonafide work done by her in personal and administration department from 23 December 2014 to 20 January 2015 .

I also declare that this project report is a result of her effort and no part of this research has been published earlier or been submitted as a project by her for any degree or diploma for any institute or university.

DATE: SIGNATURE OF MENTOR

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ACKNOWLEDGEMENT

Project report is not the work of individual. It is more a combination of views, ideas, suggestions, contribution and work involving many individuals.

I wish to express my deepest gratitude to Central Mine Planning and Design Institute’s management for giving me an opportunity to be the part of their esteem organization and enhance my knowledge by granting permission to do my training project under their guidance.

I m grateful to Mr. Kintali Naveen my guide, for her invaluable guidance and cooperation during the course of the project .She provided me with her assistance and support whenever needed

Last but not the least I would like to thanks all the internal employees and fellow trainee of CMPDI for providing consistent encouragement.

The learning from this experience has been immense and would be cherished throughout the life.

HEEMA KUMARI

TABLE OF CONTENT

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Serial No.

Topic Page no

1. Coal India: a view inside 6

2 Central Mine Planning And Design Institute: a view inside

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3 Capital Budgeting 19

4 Performance at a glance of CMPDI 35

5. Financial overview of CMPDI 36

6. Conclusion 44

7. Suggestions and recommendations 45

8. Bibliography 46

INTRODUCTION TO COAL INDIA LIMITED

Coal India Limited (CIL) as an organized state owned coal mining corporate came into being in November 1975 with the government taking over private coal mine .With the government

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undertaking over private coal mines. Head office of Coal India is located at Kolkata . With the modest production of 79 million tons at the year of its inspection CIL today is the single largest producer in the world . operating through 81 mining areas CIL is an apex body with 7 wholly owned coal producing subsidiaries and 1 mine planning and consultancy company spread over 8 provincial states of India .CIL also fully owns a mining company in Mozambique christened as ‘coal India Africana limited’. CIL also manages 200 other establishment like workshop, hospitals etc. Further it also owns 26 technical and management training institutes and 102 Vocational Training Institute Centre .Indian Institute of Coal Management (IICM) as a state-of-the-art Management Training ‘Centre of Excellence’ –the largest corporate Training Institute in India –operates under CIL and conducts multi disciplinary management development programs.

CIL having fulfilled the financial and other prerequisites was granted the Maharatna recognition in April 2011 .it is privileged status conferred by government of India to select state owned enterprises in order to empower them to expand their operation and emerge as global giants. So far ,the select club has only five members out of 217 Central Public Sector Enterprises in the country .

SUBSIDIARIES COMPANIES

Central Coalfields Limited(CCL), Ranchi, Jharkhand(1975)

Bharat Coking Coal Limited(BCCL), Dhanbad, Jharkhand(1975)

Eastern Coalfields Limited(ECL),Sanatoria, West Bengal (1975)

South Eastern Coalfields Limited(SECL), Bilaspur , Chhattisgarh

Western Coalfields Limited(WCL), Nagpur, Maharashtra(1975)

Mahanadi Coalfields Limited(MCL), Sambalpur ,Orissa(1992)

Northern Coalfields Limited(NCL), Singrauli, Madhya Pradesh

Coal India Africana Limitda, Mozambique

The consultancy company is Central Mine Planning and Design Institude Limited (CMPDIL), Ranchi , Jharkhand

FUNCTIONS OF CIL

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Pricing and distribution of coal

Coal supply agreement

Negotiation of wages

Mobilization of resources

Accounting policies

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CORPORATE STUCTURE OF COAL INDIA LIMITED

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SWOT ANALYSIS

Strength:

World’s largest producer of mica; third largest producer of coal and lignite and barites; ranks among the top producers of iron ore, bauxite, manganese ore and aluminum.

Labors easily available Large quantity of high quality reserves

Weakness:

Coal mining in India is associated with poor employee productivity The output per annum in India varies from 150 to 2,650 tons compared to an average of

around 12,000 tons in the U.S And Australia. Historically, opencast mining has been favored over underground mining. This has led to

land degradation, environmental pollution and reduced quality of coal as it tends to get mixed with other matter.

Opportunities:

Potential areas for exploration ventures include gold, diamond, copper, lead, zinc, nickel, cobalt, lithium, tin, tungsten, silver, platinum group of metals and other rare metals, chromites and manganese ore and fertilizer mineral.

Threat:

Large integrated international metal manufacturer including POSCO, Mittal Steel and Alcan have announced plans for expansion in India.

Mining companies and equipment supplies are under the constant threat of being taken over by foreign companies.

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CMPDI INTRODUCTION

CMPDI, An ISO-9001 Company, holds the pre-eminent position as India’s largest consultancy

organization and the market leader in an expanding earth resource sector. It was established in

the year 1975 as a subsidiary of Coal India Limited for rendering total consultancy services to

Coal India Limited and its seven subsidiaries.

To keep pace with the growth and the latest technological developments in the mineral and

mining industries, there is a need for consultant who can facilitate selection of appropriate

strategy-options to operate in today’s competitive environment.

CMPDI stands as a symbol of a specialist consultant for all those who are in the mineral and

mining sector. With three decades of experience and expertise in mineral exploration , mine

planning and design, infrastructure engineering, engineering ,environment, mineral beneficiation

and management services-CMPDI truly a unique ,multi-disciplinary and dynamic consulting

organization in this century .

CMPDI has more than 700 multidisciplinary technical professionals who combine innovation

and initiative to deliver fast and effective solutions in planning , implementation and

management of projects . it is equipped with modern laboratory facilities for undertaking various

analytical works to supplement its services .

It operates through its head quarters at Ranchi, the capital city of Jharkhand ,and seven Regional

Institutes located spread over six states that is:

o RI 1 located at Asansol

o RI 2 located at Dhanbad

o RI 3 located at Ranchi

o RI 4 located at Nagpur

o RI 5 located at Bilaspur

o RI 6 located at Singrauli

o RI 7 located at Bhubaneswar

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INFORMATION OF CMPDI

Central Mine Planning & Design Institute Limited (CMPDI) is a Government of India enterprise

having its corporate headquarters at Ranchi in India’

It is a fully onward subsidiary of Coal India Limited (CIL) and a Schedule-B company.

It is a Mini Ratna (Category-II) company since May 2009 and ISO 9001 certified since March

1998. It is also on way for ISO 27001 certification for its information management.

In 1972, CMPDI was originally conceived and proposed by a join study group with polish

experts as a comprehensive planning set up under one roof for entire Indian Mining industry,

which was then operating on a rudimentary planning system. This was also the time when Indian

coal industry was being nationalized to enable it to support the high growth of energy sector

required for speedy industrial growth of the country in the coming years.

In December 1973, the Government of India approved the proposal of CMPDI’s formation

restricting its field of activities initially to the then nationalized coal industry , since the need for

scientific planning for the coal mining sector has become paramount.

In January 1974, CMPDI started functioning as a division of the then recently constituted Coal

Mines Authority Ltd. (CMAL), and the planning wingh of erstwhile National Coal Development

Corporation (NCDC) forming its nucleus.

On 1st November 1975, CMAL was merged to form Coal India Ltd., and CMPDI attained the

status of a public limited company under CIL with declared scope of its business under its

Memorandum of Association broadly in line with its original proposal.

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MISSION VISION OF CMPDI

Mission

The Mission of CMPDIL is to provide total consultancy in coal and mineral exploration, mining,

engineering and allied fields as the premier consultants in India and a leading one in the

international arena.

Vision

The vision of CMPDI is to be the market leader in an expanding earth resource sector and allied

professionals activities.

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BOARD OF DIRECTORS

Sri A.K. Debnath Sri D.K. Ghosh Chairman-cum-Managing Director Director (T/ES)

Sri R.K.Chopra Sri Shekhar SaranDirector (T/P&D) Director (T/CRD)

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OBJECTIVES:

Major objective of CMPDI are as follows:

1. To provide consultancy services in coal and mineral exploration including geological, geophysical, hydrological and environmental data generation.

2. To improve quality of exploration for providing higher level of confidence of geological assessment for optimum mine planning.

3. To optimize generation of exploration of internal resources by improving productivity, preventing wastage and mobilizing adequate external resources to meet investment need.

4. Project planning and designing for coal mines, Coal beneficiation and utilization plants, etc.

5. To promote, coordinate and ensure effectiveness of research activities in coal sector under S&T and R&D Schemes.

6. To assimilate and disseminate technological information through information networks.

7. To undertake formulation of environmental management plan(EIA), Environmental Impact Assessment(EIA) and Mine Closure Plans for coal mining and related projects.

8. Extending remote sensing services for land reclamation monitoring environmental data generation, vegetation copper mapping, coal mine fire mapping, large scale topographical mapping of coal fields, infrastructural planning including selection of TPS and washery locations, etc.

9. To provide field and laboratory services to subsidiary coal producing companies of CIL.

10. To provide consultancy services to subsidiary coal producing companies of CIL.

11. To provide consultancy services to outside organization other than CIL and its subsidiaries.

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FUNCTIONS:

CMPDI functions through its headquarters at Ranchi and its regional institution

numbered 1 to 7 located at Asansol, Dhanbad, Ranchi, Nagpur, Bilaspur, Singrauli, and

Bhubaneswar respectively along with various field units and exploration camps.

The services of CMPDI fall under the following two broad heads.

A. CMPDI’s Business Function, that is the consultancy and support for mineral

exploration, mining, infrastructural engineering, environmental management, and

management systems, especially to the mineral, mining and allied sectors, both

within and outside coal industry and country.

B. CMPDI’s corporate responsibilities, are as follows.

Assisting ministry of coal (MoC) and planning commission for strategic decisions

retailing to coal-sector at the national level, through maintain inventories of coal

deposits, coal mining potentials and operations.

Functioning as a nodal agency on behalf of government of India, e.g., for schemes

funded by MoC viz S&T projects, exploration work in non-CIL blocks,

Environmental Measures and Subsidence Control(EMSC) projects, and CBM

clearing house and for projects funded by CIL R&D Board.

Liaison between MoC, CIL, and sister coal producing companies on technical and

operational matters

Working as in house planner and guide for coal-producing companies under CIL

as their integral part.

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So, the services of CMPDI are for any of the following purposes.

Services to pursue company’s business activities.

Service s to pursue research & development needs of the industry, either

independently or in association with some external agency\body.

Services technically similar to the above, but undertaken as it corporate

obligations.

BRIEF FUNCTION OF CMPDI

A Brief description of all the function of CMPDI is given below:

a) Geological Exploration and Support System- This core function of CMPDI

Since its inception offers the following services for mineral deposits:

Planning and execution of exploration;

Resources evaluation and documentation for investment and exploitation decisions; and

Related field tests and laboratory support

b) Planning, Design and Support Services- Being another core function of CMPDI since

inception, this offers the following services for construction and operation of mining,

beneficiation, utilization, and other infrastructure and engineering projects.

Formulation and evaluation of conceptual /pre-feasibility/feasibility studies, project

report, and the basic and detailed engineering design;

Engineering and other related consultancy and support: and

Related field test and laboratory support.

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c) Environmental Management services – under offer since 1992, these covers all round

support to mining industry for environmental management during their planning and

operations including Mine Closure Planning,laboratory and test support. Land use

monitoring of all major opencast mines in Coal India Ltd. Are being carried out by

satellite surveillance on yearly basis.

d) Management System Services – Under offer since 1997, these cover complete range of

consultancy and support for creation, implementation, and certification of various

standardized management systems, e.g. ISO 14001 Environmental Management System,

OHSAS18001 occupational health and safety management, and SA 8000 social

accountability management.

e) Human Resource Development- Under offer since 1976, these cover technical,

managerial, and management-systems related training to the market clientele, particularly

in mineral and mining sector.

f) Specialized Services – Expert consultancy services are also offered in the field of

Geometries including Remote sensing, Ventilation & Gas survey in mines, Controlled

Blasting, Performance evaluation of new explosives, Mining, Electronics, Mine capacity

Assessment, Mine support Design ,Rock Mass Rating (RMR), Non-destructive testing,

Management System Consultancy, Measurement of Coal and OBR, etc.

SERVICES PROVIDED BY CMPDIL

Exploration

CMPDI has completed over 1000 coal exploration projects in India in all types of terrain and

geological set up. This has resulted in providing more than 95 billion tons of coal reserves.

CMPDI has expanded its activities to manganese, iron, ore and rock phosphate. Exploration has

been also carried out in Tanzania. Annually, CMPDI carries out about 500,000 meters of drilling

camps and outsourcing.

Mine planning and design

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CMPDI has comprehensive experience in dealing with mining projects having geological

structural complexities .CMPDI has planned about 700 projects for an additional capacity

generation of over 500 million tones of coal per annum. it has developed expertise in the

reconstruction of mines , conversion of underground mines into open cast , mining in rugged

terrain etc.

Coal preparation

CMPDI offers complete consultancy services (planning, designing and construction) for new

coal washeries and mineral beneficiation as well as modernization of existing plants. In all

instances, CMPDI lays due emphasis on adoption of new technology.

Management services

For the development of infrastructure, CMPDI provides management and engineering support

services. It has developed multi disciplinary techno-managerial skill for implementation projects

of varying complexity from concept to commissioning.

Research and development

CMPDI is the Nodal Agency for coordinating R&D programmes in the coal sector.

CMPDI assist the technical sub-committee of standing scientific research committee

(SSRC) in discharged of its function.

Inviting fresh new proposal

Carrying out first level scrutiny

Processing the scrutinized proposal for the approval of technical sub-committee of SSRC

Monitoring of the progress of the projects at regular interviews

Framing the R&D budget estimates

Dissemination of research findings and promoting their applications to field operation

Dissemination of research findings and promoting their application to field operations

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INTRODUCTION OF CAPITAL BUDGETING

Budgeting is an important component of financial success. It is not difficult to implement,

and it’s not just for people with limited funds. Budgeting makes it easier for people with

incomes and expenses of all sizes to make conscious decisions about how they’d prefer to

allocate their money. It can also help people save for retirement, emergencies, and a new car

or just about anything. For many people, having a solid budget in place, knowing how much

money they have and knowing exactly where the money is going makes it easier for them to

sleep at night.(for more on saving for retirement ,see our retirement planning tutorial;

candidates, see the registered retirement saving plan(RRSP) tutorial.

This budgeting tutorial will teach you everything from setting up a budget to updating it as

your circumstances change, as well as getting back on track if you go off your budget.

Whether you’re a college undergrad, retiree or somewhere in between, if you’re looking for a

way to manage your money better and improve your financial situation than this tutorial is

for us.

Investment appraisal is the planning process used to determine whether an organization’s

long term investments such as new machinery replacement machinery, new plants, new

products, structure (debt, equity or retained earnings). It is the process of allocating resources

for investments is to increase the value of the firm to the shareholders.

The process in which the business determines whether projects such as building, a new plant

or investing in a long-term venture are worth pursuing. Oftentimes , a perspective project’s

lifetime cash inflows and outflows are assessed in order to determine whether the returns

generated meet a sufficient targent benchmark.

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Capital budgeting is the planning of long-term corporate financial projects relating to

investments funded through and affecting the firm’s capital structure. Management must

allocate the firm’s limited resources between competing opportunities (projects) , which is

one of the main focuses of capital budgeting .capital budgeting is also concerned with setting

of criteria about which projects should receive investments funding to the increase the value

of the firm, and whether to finance that investments with the equity or debt capital .

Investments should be made on the basis of value added to the future of the corporation.

Capital budgeting project may include a wide variety of different types of investments,

including but not limited to, expansion policies, or mergers and acquisitions. When no such

value can be added through the capital budgeting process and excess cash surplus exists and

is not needed, then management is expected to pay out some or all of those surplus earnings

in the form of cash dividends or to repurchase the company’s stock through a share payback

program.

Choosing between capital budgeting projects may be based upon several inter-related criteria.

1. Corporate management seeks to maximize the value of the firm by investing in projects

which yield a positive net present value when value using an appropriate discount rate in

consideration of risks.

2. These projects must be financed appropriately.

3. If no positive NPV projects exists and excess cash surplus is not needed to the firm, then

financial theory suggests that management should return some or all of the excess cash to

shareholders (i.e., distributions via dividends).

Capital budgeting involves allocating the firm’s capital resources between competing

projects and investments. Each potential project’s value should be estimated using a

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discounted (DCF) valuation, to find its net present value . This valuation requires

estimating the size and timing of all the incremental cash flows from the project .( These

future cash highest NPV(GE).The NPV is greatly affected by the discount rate, so

selecting the proper rate-sometimes called the hurdle rate-is critical to the making the

right decisions. The hurdle rate is the Minimum acceptable rate of return on an

investments. This should reduce the rate of riskiness of the investments, typically

measured by the volatility of the cash flows, and must take into account the financing

mix. Managers may use models such as CAPM or the APT to estimate a discount rate

appropriate for each particular project , and use the weighted average cost of capital

(WACC) that applies to the entire firm, but higher discount rate may be more appropriate

then a project risk of the firm as a whole.

Ideally, business should pursue all projects and opportunities that enhance the

shareholder value. However, because the same amount of capital available at any given

time for new project is limited , management need to use capital budgeting techniques to

determine which project will yield the most return over an applicable period of time.

Need for Capital Budgeting

1. As large sum of money is involved which influences the profitability of the firm making

capital budgeting an important task.

2. Long term investment once made cannot be reversed without significance loss of

invested capital. The investment becomes sunk and mistakes, rather than being readily

rectified, must often be borne until the firm can be withdrawn through depreciation

charges or liquidation. It influences the whole conduct of the business for the years to

come.

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3. Investment decision are the base on which the profit will be earned and probably measured

through the return on the capital. A proper mix of capital investment is quite important to

ensure adequate rate of return on investment, calling for the need of capital budgeting.

4. The implication of long term investment decisions are more extensive than those of short

run decisions because of time factor involved, capital budgeting decisions are subject to the

higher degree of risk and uncertainty than short run decision.

Factors influencing capital budgeting are :

Availablity of funds

Structure of capital

Taxation policy

Government policy

Lending policies of financial institutions

Immediate need of the project

Earnings

Capital returns

Economic value of the project

Working capital

Accounting practice

Trend of earnings

Risk of business

Forecast of the market

Political unrest

Geographical condition

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Exchange rate of currency

Need of capital budgeting:

1. As large sum of money is involved which influences that profitability of the firm making

capital budgeting an important task.

2. Long term investment once made cannot be reversed without significance loss of invested

capital. The investment becomes sunk and mistakes, rather than being readily rectified,

must often be borne until the firm can be withdrawn through depreciation charges or

liquidation. It influences the whole conduct of the business for the years to come.

3. Investment decision are base on which the profit will be earned and probably measured

through the return on investment, calling for the need of capital budgeting.

4. The implication of long term investment decisions are more extensive than those of short

run decisions because of the time factor involved, capital budgeting decisions are more

subject to the higher degree of risk and uncertainty than short run decision.

Evaluation technique of capital budgeting:

Payback period

Net present value

Internal rate of return

Modified rate of return

Profitability index

According rates of return

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Payback period

Payback period in capital budgeting refers to the period of time required to recoup the funds

expended in an investment, or to reach the break-even point. For example, a $1000 investment

which returned $500 per year would have a two-year payback period. The time value of money

is not taken into account. Payback period intuitively measures how long something takes to "pay

for itself." All else being equal, shorter payback periods are preferable to longer payback periods.

Payback period is popular due to its ease of use despite the recognized limitations described

below.

The term is also widely used in other types of investment areas, often with respect to energy

efficiency technologies, maintenance, upgrades, or other changes. For example, a compact

fluorescent light bulb may be described as having a payback period of a certain number of years

or operating hours, assuming certain costs. Here, the return to the investment consists of reduced

operating costs. Although primarily a financial term, the concept of a payback period is

occasionally extended to other uses, such as energy payback period (the period of time over

which the energy savings of a project equal the amount of energy expended since project

inception); these other terms may not be standardized or widely used.

Purpose

Payback period as a tool of analysis is often used because it is easy to apply and easy to

understand for most individuals, regardless of academic training or field of endeavor. When used

carefully or to compare similar investments, it can be quite useful. As a stand-alone tool to

compare an investment to "doing nothing," payback period has no explicit criteria for decision-

making (except, perhaps, that the payback period should be less than infinity).

The payback period is considered a method of analysis with serious limitations and qualifications

for its use, because it does not account for the time value of money, risk, financing, or other

important considerations, such as the opportunity cost. Whilst the time value of money can be

rectified by applying a weighted average cost of capital discount, it is generally agreed that this

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tool for investment decisions should not be used in isolation. Alternative measures of "return"

preferred by economists are net present value and internal rate of return. An implicit assumption

in the use of payback period is that returns to the investment continue after the payback period.

Payback period does not specify any required comparison to other investments or even to not

making an investment.

Construction

Payback period is usually expressed in years. Start by calculating Net Cash Flow for each year:

Net Cash Flow Year 1 = Cash Inflow Year 1 - Cash Outflow Year 1. Then Cumulative Cash

Flow = (Net Cash Flow Year 1 + Net Cash Flow Year 2 + Net Cash Flow Year 3, etc.)

Accumulate by year until Cumulative Cash Flow is a positive number: that year is the payback

year.

To calculate a more exact payback period: Payback Period = Amount to be Invested/Estimated

Annual Net Cash Flow[2]

It can also be calculated using the formula:

Payback Period = (p - n)÷p + ny

= 1 + ny - n÷p (unit:years)

Where

ny= The number of years after the initial investment at which the last negative value of

cumulative cash flow occurs.

n= The value of cumulative cash flow at which the last negative value of cumulative cash flow

occurs.

p= The value of cash flow at which the first positive value of cumulative cash flow occurs.

This formula can only be used to calculate the soonest payback period; that is, the first period

after which the investment has paid for itself. If the cumulative cash flow drops to a negative

value some time after it has reached a positive value, thereby changing the payback period, this

formula can't be applied. This formula ignores values that arise after the payback period has been

reached.

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Additional complexity arises when the cash flow changes sign several times; i.e., it contains

outflows in the midst or at the end of the project lifetime. The modified payback period

algorithm may be applied then. First, the sum of all of the cash outflows is calculated. Then the

cumulative positive cash flows are determined for each period. The modified payback is

calculated as the moment in which the cumulative positive cash flow exceeds the total cash

outflow.

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Net present value

In finance, the net present value (NPV) or net present worth (NPW) is defined as the sum of

the present values (PVs) of incoming and outgoing cash flows over a period of time. Incoming

and outgoing cash flows can also be described as benefit and cost cash flows, respectively.

Time value of money dictates that time has an impact on the value of cash flows. Cash flows of

nominal equal value over a time series result in different effective value cash flows that makes

future cash flows less valuable over time. If for example there exists a time series of identical

cash flows, the cash flow in the present is the most valuable, with each future cash flow

becoming less valuable than the previous cash flow. Thus, a cash flow today is more valuable

than an identical cash flow in the future. This decrease occurs because the discount factor

represents the expected rate of return of each cash flow in a different investment with identical

risk. With each additional period, the present value of a subsequent future cash flow decreases.

The NPV of an investment is determined by calculating the present value (PV) of the total

benefits and costs which is achieved by discounting the future value of each cash flow (see

Formula). NPV is a useful tool to determine whether a project or investment will result in a net

profit or a loss because of its simplicity. A positive NPV results in profit, while a negative NPV

results in a loss. The NPV measures the excess or shortfall of cash flows, in present value terms,

above the cost of funds.[4] In a theoretical situation of unlimited capital budgeting a company

should pursue every investment with a positive NPV. However, in practical terms a company's

capital constraints limit investments to projects with the highest NPV whose cost cash flows do

not exceed the company's capital. NPV is a central tool in discounted cash flow (DCF) analysis

and is a standard method for using the time value of money to appraise long-term projects. It is

widely used throughout economics, finance, and accounting.

In the case when all future cash flows are incoming (such as the principal and coupon payment

of a bond) the only outflow of cash is the purchase price, the NPV is simply the PV of future

cash flows minus the purchase price (which is its own PV). NPV can be described as the

“difference amount” between the sums of discounted cash inflows and cash outflows. It

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compares the present value of money today to the present value of money in the future, taking

inflation and returns into account.

The NPV of a sequence of cash flows takes as input the cash flows and a discount rate or

discount curve and outputs a price. The converse process in DCF analysis — taking a sequence

of cash flows and a price as input and inferring as output a discount rate (the discount rate which

would yield the given price as NPV) — is called the yield and is more widely used in bond

trading.

Formula

Each cash inflow/outflow is discounted back to its present value (PV). Then they are summed.

Therefore NPV is the sum of all terms,

where

– the time of the cash flow

– the discount rate (the rate of return that could be earned on an investment in the financial

markets with similar risk.); the opportunity cost of capital

– the net cash flow i.e. cash inflow – cash outflow, at time t . For educational purposes, is

commonly placed to the left of the sum to emphasize its role as (minus) the investment.

The result of this formula is multiplied with the Annual Net cash in-flows and reduced by Initial

Cash outlay the present value but in cases where the cash flows are not equal in amount, then the

previous formula will be used to determine the present value of each cash flow separately. Any

cash flow within 12 months will not be discounted for NPV purpose, nevertheless the usual

initial investments during the first year R0 are summed up a negative cash flow.[5]

Given the (period, cash flow) pairs ( , ) where is the total number of periods, the net

present value is given by:

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Internal rate of return

The internal rate of return (IRR) or economic rate of return (ERR) is a rate of return used in

capital budgeting to measure and compare the profitability of investments. It is also called the

discounted cash flow rate of return (DCFROR). In the context of savings and loans, the IRR is

also called the effective interest rate. The term internal refers to the fact that its calculation does

not incorporate environmental factors (e.g., the interest rate or inflation).

Definition

The internal rate of return on an investment or project is the "annualized effective compounded

return rate" or rate of return that makes the net present value (NPV as NET*1/(1+IRR)^year) of

all cash flows (both positive and negative) from a particular investment equal to zero. It can also

be defined as the discount rate at which the present value of all future cash flow is equal to the

initial investment or in other words the rate at which an investment breaks even.

In more specific terms, the IRR of an investment is the discount rate at which the net present

value of costs (negative cash flows) of the investment equals the net present value of the benefits

(positive cash flows) of the investment.

IRR calculations are commonly used to evaluate the desirability of investments or projects. The

higher a project's IRR, the more desirable it is to undertake the project. Assuming all projects

require the same amount of up-front investment, the project with the highest IRR would be

considered the best and undertaken first.

A firm (or individual) should, in theory, undertake all projects or investments available with

IRRs that exceed the cost of capital. Investment may be limited by availability of funds to the

firm and/or by the firm's capacity or ability to manage numerous projects.

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Uses of IRR

Because the internal rate of return is a rate quantity, it is an indicator of the efficiency, quality, or

yield of an investment. This is in contrast with the net present value, which is an indicator of the

value or magnitude of an investment.

An investment is considered acceptable if its internal rate of return is greater than an established

minimum acceptable rate of return or cost of capital. In a scenario where an investment is

considered by a firm that has shareholders, this minimum rate is the cost of capital of the

investment (which may be determined by the risk-adjusted cost of capital of alternative

investments). This ensures that the investment is supported by equity holders since, in general,

an investment whose IRR exceeds its cost of capital adds value for the company (i.e., it is

economically profitable).

One of the uses of IRR is by corporations that wish to compare capital projects. For example, a

corporation will evaluate an investment in a new plant versus an extension of an existing plant

based on the IRR of each project. In such a case, each new capital project must produce an IRR

that is higher than the company's cost of capital. Once this hurdle is surpassed, the project with

the highest IRR would be the wiser investment, all other things being equal (including risk).

IRR is also useful for corporations in evaluating stock buyback programs. Clearly, if a company

allocates a substantial amount to a stock buyback, the analysis must show that the company's

own stock is a better investment (has a higher IRR) than any other use of the funds for other

capital projects, or than any acquisition candidate at current market prices.

Calculation

Given a collection of pairs (time, cash flow) involved in a project, the internal rate of return

follows from the net present value as a function of the rate of return. A rate of return for which

this function is zero is an internal rate of return.

Given the (period, cash flow) pairs ( , ) where is a positive integer, the total number of

periods , and the net present value , the internal rate of return is given by in:

31

The period is usually given in years, but the calculation may be made simpler if is calculated

using the period in which the majority of the problem is defined (e.g., using months if most of

the cash flows occur at monthly intervals) and converted to a yearly period thereafter.

Any fixed time can be used in place of the present (e.g., the end of one interval of an annuity);

the value obtained is zero if and only if the NPV is zero.

In the case that the cash flows are random variables, such as in the case of a life annuity, the

expected values are put into the above formula.

Often, the value of cannot be found analytically. In this case, numerical methods or graphical

methods must be used.

Use of IRR at CMPDIL

As CMPDIL is a planning company .it uses IRR for evaluating proposed project of various

companies. If IRR of a proposed project is 12% or more only then CMPDIL suggest the firm to

accept the project. CMPDIL uses MS excel software for the calculation of IRR.

32

Modified Rate of Return

The Modified Internal Rate of Return (MIRR) is a financial measure of an investment's

attractiveness. It is used in capital budgeting to rank alternative investments of equal size. As the

name implies, MIRR is a modification of the internal rate of return (IRR) and as such aims to

resolve some problems with the IRR.

Calculation of the MIRR

MIRR is calculated as follows:

,

where n is the number of equal periods at the end of which the cash flows occur (not the number

of cash flows), PV is present value (at the beginning of the first period), FV is future value (at the

end of the last period).

The formula adds up the negative cash flows after discounting them to time zero using the

external cost of capital, adds up the positive cash flows including the proceeds of reinvestment at

the external reinvestment rate to the final period, and then works out what rate of return would

cause the magnitude of the discounted negative cash flows at time zero to be equivalent to the

future value of the positive cash flows at the final time period.

Spreadsheet applications, such as Microsoft Excel, have inbuilt functions to calculate the MIRR.

In MicroProfitability Index

Profitability index is an investment appraisal technique calculated by dividing the present value

of future cash flows of a project by the initial investment required for the project.

33

Formula:

Profitability Index

= Present Value of Future Cash Flows

Initial Investment Required

= 1 + Net Present Value

Initial Investment Required

34

Accounting rate of return

Accounting rate of return, also known as the Average rate of return, or ARR is a financial ratio

used in budgeting. The ratio does not take into account the concept of time value of money. ARR

calculates the return, generated from net income of the proposed capital investment. The ARR is

a percentage return. Say, if ARR = 7%, then it means that the project is expected to earn seven

cents out of each dollar invested (yearly). If the ARR is equal to or greater than the required rate

of return, the project is acceptable. If it is less than the desired rate, it should be rejected. When

comparing investments, the higher the ARR, the more attractive the investment. Over one-half of

large firms calculate ARR when appraising projects.

Basic formulas

where=Profit/investment equals to ARR.

ARR = Incremental Revenue - Incremental Expenses (Including Depreciation)/Initial Investment

Average Profit = Profit After Tax/Life of Project.

35

HOW CAPITAL BUDGETING TECHNIQUES ARE USED IN CMPDI

Introduction

The amount of money allotted to the maintenance and growth of a business. A revenue budget is

essentaial to management and is the result of business forecasts of sales, revenue, expenses and

capiatal expenditure. Revenue budget help business save time and effort by the proper use it

allows for alternative actions to be developed prior to the start of the new year.

The benefit of a revenue budget

The main benefit of a revenue budget is that it requires looking into the future. The revenue

budget should contain the assumption made about the future and the details about the number

units to be sold, the expected selling prices, and so on.

The budgeted amount of revenue is then compared to the budgeted amount of expenses in order

to determine if the revenues are adequate. Learning of a potential problem before the year begins

is a huge benefit because it allows for alternative actions to be developed prior to the start of the

year.

When an annual revenue budget is detailed by mouth, each months actual revenues can be

compared to the budgeted amount .Similarly, the actual revenues can be compared to the

budgeted revenues for the same period. in other word, monthly revenues budgets allow you to

monitor revenues as the year progresses instead of being surprised at the end of the year.

36

PERFORMANCE AT A GLANCE of CMPDIL

particulars unit 2009-10 2010-11 2011-12 2012-13

2013-2014

1 Sale of service

(net sales)

Rs in crore

453.53 429.09 524.03 601.05 647.43

2 Profit before tax Rs in crore

19.61 23.69 30.79 29.77 34.60

3 profit after tax Rs in crore

11.46 15.32 19.61 25.05 19.57

4 Retained profit Rs in crore

11.46 15.32 19.61 25.05 19.57

5 Net block Rs in crore

67.56 71.95 78.06 75.18 71.45

6 Net worth Rs in crore

73.78 87.92 110.92 134.89 155.88

7 Current assets Rs in crore

417.88 409.67 466.93 580.21 629.85

8 Current liabilities

Rs in crore

317.26 319.66 347.72 446.06 491.13

9 Working capital (7-8)

Rs in crore

100.62 90.01 119.21 134.15 138.78

10 Capital emloyed Rs in crore

168.18 161.96 197.27 209.33 210.17

11 Gross margin Rs in crore

27.30 27.3026.51 36.68 42.61 44.06

12 Value added Rs in crore

10.48 10.31 16.95 21.68 23.07

13 Number of employees

Rs in crore

3156 3102 3129 3142 3135

14 Value added per employee

Rs in crore

33.21 33.21 54.17 69.00 73.59

37

15 Return capital emoployed

Rs in crore

11.66 14.63 15.61 14.22 16.46

16 Face value per share

Rs in crore

1000.00 1000.00 1000.00 1000.00 1000.00

17 Earning per share

Rs in crore

602.00 805.00 1030 1316.00 1028.00

Note:

Net worth = paid up capital + reserves and surplus - accumulated loss & deferred revenue

Capital employed = net block +working capital

Gross margin = net profit+ depreciation+ interest+ pp adjustment+ tax expenses

Value added = gross margin-10%of capital employed

38

FINANCIAL OVERVIEW OF CMPDIL

19.99%

364.53%

3.11%17.64%

152.27%

14.25%41.04%

FINANCIAL ANALYSIS2013-14

Consumption of stores & sparesEmployess remuneration & benefitsPower and fuelsocial overheadContractual expensesRepairsmiscellaneous

Sales break-up (in Rs crore)

Total sales Planning and & design

Exploration Environmental0

100

200

300

400

500

600

700

sales break-up in croreColumn1Column2

39

2010-11 2011-12 2012-130

50

100

150

200

250

161.96

197.27 200.24

capital employed in crore

year

capi

tal e

mpl

oyed

2010-2011 2011-2012 2012-20130

100

200

300

400

500

600

405.4

493.24

571.280000000001

264.78

334.36367.72

75.43 93 114.13

16.12 16.67 15.2849.07 49.21

74.15

Expenditure Breakup (in crores)

Total Exp Emp Rem contractual stores other

year

EXPE

NDI

TURE

40

2010-2011 2011-2012 2012-20130

100

200

300

400

500

600

700

429.09

524.03

601.049999999999

166.86194.28 214.8240.06

307.4361.92

22.17 22.35 24.33

Sales Breakup (in crores)

Total sales P&D Exploration Environment

year

Sal

es

2010-11 2011-12

2012-13

0

5

10

15

20

25

30

15.3219.65

25.05

Profit after tax Rs. In crore

Year

PAT

41

2010-112011-12

2012-13

0

100

200

300

400

500

600

700

429.09524.09 601.049999999999

Sale of services(net sales) in crores

year

sale

s

2010-11 2011-12 2012-130

5

10

15

20

25

30

35

23.69

30.79 29.77

Profit before tax in crores

Year

PBT

42

2010-11 2011-12 2012-130

20

40

60

80

100

120

140

87.92

110.92

134.89

Net worh in crore

year

Net

wor

th

2010-11 2011-12 2012-130

50

100

150

200

250

161.96

197.27 200.24

capital employed in crore

year

capi

tal e

mpl

oyed

43

2010-112011-12

2012-13

05

1015202530354045

26.51

36.6842.61

Gross margin

year

Gro

ss M

argi

n

44

CONCLUSION

Capital budgeting technique are used to determine long terms goals, new investment

oppurtunities and estimating and forecasing future and current cash flows. With any capital

budgeting techniques measuring risks uncertainty and the cash of the capital as well as antic

pated project performance determine as whether to accept the project or reject it. When using

evaluation techniques. It is best to use more than one perspective so as not to pepuce biased

result.

According to the capital budgeting techniques” the internal Rate of return” method is the most

communally used method CMPDI for evaluating capital budgeting prop seals. The use of IRR, as

a criterion to accept capital investment decision involutes a comparison of IRR with the required

rate of return known as cut of rates. For the investments decision to be viable the project

theproject is accepted when IRR is equal to or greater than 12% at 85% of the project capacity.

Else the project is rejected.

Ratio analysis helps to compare different ratio of different year which’s be unofficial for

shareholder and company 100 for company 100 for comparison purpose. Through this process

we come to know that the condition as CMPDI is good.

45

SUGGESTIONS AND RECOMMENDATION

CMPDI used 12% IRR at 85% capacity. But according to present market scenario 12% is

undoubtly too low. This is mainly because IRR is sum of the cost of capital and risk premicem

according to the current market scenario us very high.

CMPDI being a government organization is in the position to accept the project at 12% IRR at

85% capacity because the cost as well as the consequences is born by the government and the

company has with itself excessive amount of liquid capital as. Well as liquid assets.

IRR should be more than 12% in order cope up with the present market scenario.

46

Bibliography

Website

1. www.cmpdi.co.in

2. www.coalindia.in

Book

1. Financial management-IM Pandey, Dr. S.P Gupta

2. Annual Report and Accounts of CMPDIL

47