Capital budgeting is one of the most vital areas of Financial Management in Mining, covered under the DGMS syllabus for First and Second Class Manager (Coal & Metal) exams.
It deals with long-term investment decisions, such as opening a new mine, purchasing large machinery, or expanding production capacity. A correct capital budgeting decision ensures that the mine remains profitable, safe, and sustainable throughout its life.
🏗️ Importance of Capital Budgeting Mining is a capital-intensive industry —
involving heavy investments in exploration, equipment, land, and environmental compliance.
Wrong investment decisions can lead to heavy financial losses or even closure. 🔹 Objectives of Capital Budgeting: - To select projects that maximize company value.
- To allocate resources efficiently.
- To evaluate project feasibility before implementation.
- To assess long-term profitability and cash flows.
- To include safety and environmental costs in project planning.
🔹 Relevance in DGMS Exams:
The DGMS Management Paper includes numericals and theory on: - Payback Period
- NPV (Net Present Value)
- IRR (Internal Rate of Return)
- Benefit-Cost Ratio
- Break-even analysis
💰 Methods Used in Mining Projects Capital budgeting techniques are divided into traditional and discounted cash flow (DCF) methods. 🔸 1. Payback Period Method - Measures how quickly initial investment is recovered.
- Formula:
Payback = Initial Investment / Annual Cash Inflow - Simple to use but ignores time value of money.
Example: If ₹100 crore is invested and annual inflow is ₹20 crore →
Payback = 100 / 20 =
5 years
🔸 2. Net Present Value (NPV) - Calculates the present value of future cash inflows minus outflows.
- Formula:
NPV = Σ [(Cash inflow – Cash outflow) / (1 + r)ⁿ] - Accept project if NPV > 0.
Mining Example: If a new dumper fleet generates cash inflows exceeding cost at 10% discount rate → project accepted.
🔸 3. Internal Rate of Return (IRR) - The discount rate at which NPV = 0.
- Higher IRR → better project.
- Used for comparing multiple projects in the same mine.
🔸 4. Benefit-Cost Ratio (BCR) - Ratio of present value of benefits to present value of costs.
- If BCR > 1, the project is financially viable.
Example: For reclamation project → if benefits (₹5 crore) exceed costs (₹3 crore), BCR = 1.67 → acceptable.
🔸 5. Accounting Rate of Return (ARR) - Measures profitability based on accounting income.
- Formula:
ARR = (Average Annual Profit / Initial Investment) × 100
🔸 6. Discounted Payback Period - Considers the time value of money, unlike normal payback.
- More realistic for long-term mining projects.
🔸 7. Risk & Sensitivity Analysis - Mining projects face risks like commodity price fluctuation, delay, or regulatory changes.
- Sensitivity analysis tests project stability under varying conditions.
⚖️ DGMS Exam Applications DGMS questions often test: - Comparison between IRR, NPV, and Payback.
- Conceptual questions on “time value of money.”
- Numerical examples for project feasibility.
- Inclusion of safety, reclamation, and environment costs.
Tip for Candidates: While answering, always relate the concept to a mining example — such as “purchase of a new dragline” or “expansion of underground section.”
⚡ Quick One-Liners - Capital budgeting = long-term investment planning.
- Key techniques: Payback, NPV, IRR, BCR, ARR.
- NPV > 0 → project viable.
- IRR = discount rate at which NPV = 0.
- BCR > 1 → economically feasible.
- Payback = initial investment ÷ annual cash inflow.
- DGMS exam includes both theory & numerical.
- Time value of money → key concept.
- Used for mine planning & financial forecasting.
- Also includes environmental and safety costs.
✍️ Descriptive Model Answer
Q: Explain the importance and methods of capital budgeting in mining projects.
Answer:Capital budgeting refers to evaluating and selecting long-term investment projects.
In mining, these include opening new mines, installing HEMM, or safety infrastructure.
Methods such as NPV, IRR, and Payback Period are applied to compare costs and returns.
Capital budgeting ensures optimum resource use, profitability, and compliance with DGMS-approved safety and environmental norms. Conclusion:Effective capital budgeting aligns economic efficiency with sustainable mining operations — a key expectation under DGMS financial management topics.
🎯 25 MCQs – Capital Budgeting in Mining
Q1. Capital budgeting involves:
A. Short-term financing
B. Long-term investment decisions
C. Working capital only
D. Day-to-day expenses
E. None
Answer: B.
Solution: Used for evaluating long-term projects.
Q2. The main objective of capital budgeting is to:
A. Reduce staff
B. Maximize shareholder wealth
C. Increase safety reports
D. Control labour cost
E. None
Answer: B.
Solution: Select profitable investments.
Q3. NPV stands for:
A. Net Present Value
B. Nominal Profit Value
C. Net Product Volume
D. None
E. New Project Variable
Answer: A.
Solution: NPV = PV of inflows – PV of outflows.
Q4. A project is accepted if NPV is:
A. Negative
B. Positive
C. Zero
D. None
Answer: B.
Solution: Positive NPV = feasible.
Q5. IRR is:
A. Interest rate of return
B. Internal Rate of Return
C. Initial Recovery Ratio
D. None
Answer: B.
Solution: IRR = rate at which NPV = 0.
Q6. Payback Period measures:
A. Total profits
B. Time to recover investment
C. Cash flow ratio
D. None
Answer: B.
Solution: Indicates liquidity.
Q7. Benefit-Cost Ratio > 1 means:
A. Project loss
B. Break-even
C. Project profitable
D. None
Answer: C.
Solution: Benefits exceed costs.
Q8. ARR is based on:
A. Cash inflows
B. Accounting profit
C. Investment turnover
D. None
Answer: B.
Solution: Uses accounting data.
Q9. CBA in mining includes:
A. Financial & environmental factors
B. Safety cost
C. Social compensation
D. All of the above
Answer: D.
Solution: Comprehensive evaluation.
Q10. Time value of money is used in:
A. Payback Period
B. NPV & IRR
C. ARR
D. None
Answer: B.
Solution: Discounted cash flow methods.
Q11. Higher IRR indicates:
A. Lower risk
B. Higher profitability
C. Lower NPV
D. None
Answer: B.
Solution: Higher returns on investment.
Q12. Payback ignores:
A. Cash inflows
B. Time value of money
C. Investment cost
D. All
Answer: B.
Solution: Its main limitation.
Q13. Environmental rehabilitation cost is part of:
A. Revenue expense
B. Capital investment
C. Miscellaneous cost
D. None
Answer: B.
Solution: Included in project cost.
Q14. DGMS includes capital budgeting under:
A. Legislation
B. Management (Financial Management)
C. Safety
D. None
Answer: B.
Solution: Covered in management syllabus.
Q15. NPV is sensitive to:
A. Discount rate
B. Equipment price
C. Project life
D. All of the above
Answer: D.
Solution: Affects viability.
Q16. IRR method considers:
A. Time value of money
B. Simple average
C. Historical cost
D. None
Answer: A.
Solution: More accurate profitability measure.
Q17. BCR = 1 means:
A. No profit or loss
B. Project profitable
C. Rejected project
D. None
Answer: A.
Solution: Neutral feasibility.
Q18. In mining, CBA must include:
A. Safety & environmental cost
B. Wage cost only
C. Production cost only
D. None
Answer: A.
Solution: Integral to sustainable mining.
Q19. IRR is:
A. Fixed for all projects
B. Unique for each project
C. Not applicable to mining
D. None
Answer: B.
Solution: Varies by project returns.
Q20. NPV method:
A. Considers time value
B. Ignores time value
C. Uses accounting data
D. None
Answer: A.
Solution: Uses discounting.
Q21. ARR does not consider:
A. Cash flow
B. Profit
C. Investment
D. All
Answer: A.
Solution: Based on profit, not cash.
Q22. Discount rate =
A. Cost of capital
B. Inflation rate
C. Return on equity
D. None
Answer: A.
Solution: Used for discounting.
Q23. Which technique gives both time & value accuracy?
A. NPV
B. Payback
C. ARR
D. None
Answer: A.
Solution: Most precise DCF method.
Q24. Feasibility study includes:
A. Technical
B. Economic
C. Environmental
D. All
Answer: D.
Solution: All are necessary for mining.
Q25. DGMS may test capital budgeting under:
A. Financial Management paper
B. Safety Management
C. Environment
D. None
Answer: A.
Solution: Part of Management subject.
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