CHAPTER -- 1

1

C OAL I NDUSTRY I N I NDIA- A R EVIEW

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.

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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

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C ENTRAL C OALFIELDS L IMITED (CCL),

R ANCHI, J HARKHAND

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 Mines

63 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 Coalfields 

6 (East Bokaro, West Bokaro, North 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)

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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.

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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.

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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.

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V ISION & M ISSION O F 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."

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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.

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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.

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.

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ORAGANISATIONAL STRUCTURE :

ADMINISTRATIVE SETUP

12

Shri R. K. SAHA (CMD)

Shri A. Chatterjee Director(Finance)

G.M (Finance)

Cash

Accounts

Cost and Budgeting

Tax

IAD

Chief (IAD)

G.M (Systems)

T.K. Chand Director(Personnel)

T.K.Nag Director (T)(Operation) Director (P&P)

Ministry of coal (New delhi)

CIL(KOLKATA)

NCL,MCL,BCCL,ECL,WCL,SECL,

CMPDIL

CCL,RANCHICORPORATE H.Q.

UNIT

11 COAL PRODUCTION AREA

MINES RESCUE

STATION

CCWD AREAS(WASHERIES)

HOSPITAL CENTRAL STORES

CENTRAL W ORKSHOP

NEC

FINANCIAL HIGHLIGHTS OF CCL

PROFIT & LOSS ACCOUNT FOR THE YEAR ENDING 31 ST MARCH, 2010

ScheduleFOR THE YEAR ENDED

31.3.2010 (Rs. In Lakh)

FOR THE YEAR ENDED 31.3.2009 (Rs. In Lakh)

INCOME :

Sales1

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

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

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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 31 ST MARCH, 2010

ScheduleAs at 31.3.2010

(Rs. In Lakh)As at 31.3.2009 (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

266063.96 214682.82

2 Loan Funds :

(a) Secured 0.00 0.00

(b) Unsecured E 11205.41 29397.58

11205.41 29397.58

TOTAL 277269.37 244080.40

II. APPLICATIONS OF FUNDS :

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1 Fixed Assets :

(a) Gross Block F 465900.25 448490.81

Less : Depreciation 314281.44 303800.93

Net Block 151618.81 144689.88

(b) Capital Work in Progress (Net) G 34304.70 31135.31

185923.51 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

Total Current Assets, Loans & Advances 566643.75 627013.45

Less : Current Liabilities & Provisions N 531679.68 621854.11

Net Current Assets 34964.07 5159.34

   

TOTAL 277269.37 244080.18

SIGNIFICANT ACCOUNTING POLICY P

NOTES ON ACCOUNTS QBALANCE SHEET ABSTRACT AND

COMPANY'S GENERAL

BUSINESS PROFILE R

CASH FLOW STATEMENT S

SWOT ANALYSIS OF CCL

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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.

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.

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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.

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:

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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.

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.

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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.

.

19

CHAPTER -- 2

I ntroduction O f C apital B udgeting

Capital Budgeting

20

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.

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.

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Types of Investment decisions

One classification is as follows:

Expansion of existing business

Expansion of new business

Replacement and modernization.

Yet another useful way to classify investment is as follows:

Mutually exclusive 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.

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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.

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 Methodb) Internal Rate of Return methodc) Discounted payback periodd) 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.

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The formula for the net present value can be written as follows:

NPV =¿C0

Where,

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

The NPV Acceptance rules are:1. Accept if NPV>02. Reject if NPV<03. 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

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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.

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.

¿

∑t=1

nCt¿¿ ¿

25

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

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.

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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:

27

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

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

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PI = 11251000

= 1.125

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:

ARR = Average Earning After Tax

Average Investment×100

29

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.

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(0.35%)

EAT

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

ARR =Average Earning After Tax

Average Investment ×100

30

¿ 11250÷ 550,000÷ 2 ×100

¿9 %

Advantages:

It selects alternative uses of fund. It considers saving over the entire life of the project. In addition to measuring the desirability of new 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.

Payback period = Initial Investment

Net annual cashflow

For Example:

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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:

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

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.

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(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.

33

CHAPTER -- 3

C APITAL B UDGETING P RACTICES IN

CCL :

The long term investment decisions are done in two categories :

With respect to capital expenditure

With respect to project selection.

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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.

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:

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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 .

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.

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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).

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 Acquisitionii. Forestry Clearance

iii. PR Preparation iv. Initial Infrastructurev. EMP Clearance

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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’

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 PurchaseUnder 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.

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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 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.

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

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MINUTES

MINUT

Change

N No Change

CCEA Note (Must)

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

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

Sl.No. Name ofProject

Capacity(MTY)

ProposedCapital Outlay

(Rs. Cr.)

Approvalfrom CCL

board

Govt’s approval/Present status

1 Magadh OCP

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

2 Ashok Expn. OCP

6.50 471.66 June’03Approved by Govt. vide letter dated 13.04.06 from MOC.Project is under implementation.

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3 Konar OCP 3.50 74.53 April’04Approved by CCL Board on 12.08.06. (As per revised Delegation of power of CCL Board)

4 Karo OCP 3.50 96.53 July’05Approved by CCL Board on 12.08.06. (As per revised Delegation of power of CCL Board)

5 Topa RO 1.20 65.25 -Approved by CIL Board on 06.03.02.Project is under implementation.

6 Amrapali OCP

12.00 517.62 Feb’03CCEA note submitted to MoC on 06.11.06

7 North Urimari OCP

3.00 179.87 May’04Approved by CCL board on 07.12.07 (as per Revised Delegation of Power of CCL board)

8 Churi Benti UGP

0.81 163.51 April’07Approved by CIL Board on 27.08.07.Project is under implementation

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

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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

Strategy for financing or future project

Internal Generation External funding through Financial Institutions Bill of Transfer

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CHAPTER -- 4

R esearch M ethodology

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.

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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:

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

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concerns. That is why some problem had come in collecting data. I have

tried my best for collecting data.

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CHAPTER -- 5

D ETAIL E VALUATION O F A P ROJECT

Economic Evaluation

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

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

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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.

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:

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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.

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:

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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:

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.

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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 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.

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