Introduction
Mining projects are highly capital intensive. From acquiring land to purchasing Heavy Earth Moving Machinery (HEMM), installing processing plants, and ensuring statutory safety equipment, financial management plays a crucial role.
A key function is capital budgeting, where managers evaluate, compare, and decide on large investments. For DGMS exams, this is a common topic under Management & Planning.

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H2: Importance of Financial Management in Mining

• Mining is high-risk, high-investment industry.
• Efficient financial management ensures:
  • Optimum use of limited resources.
  • Proper allocation between development, production, safety, and environment.
  • Monitoring of costs, revenues, and profitability.
• Poor financial control can lead to:
  • Project delays, unsafe cost-cutting, or closure.
  • Failure to comply with DGMS-mandated safety provisions.

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H2: Capital Budgeting Basics What is Capital Budgeting?
Capital budgeting is the process of planning and evaluating long-term investments such as opening a new mine, buying HEMM, or setting up a beneficiation plant. Key Techniques:

1. Payback Period:
   • Time taken to recover the initial investment.
   • Simple but ignores time value of money.
2. Net Present Value (NPV):
   • Present value of inflows minus outflows.
   • Positive NPV → project acceptable.
3. Internal Rate of Return (IRR):
   • Discount rate at which NPV = 0.
   • IRR > cost of capital → accept project.
4. Benefit-Cost Ratio:
   • PV of benefits ÷ PV of costs.

   • 1 → economically feasible.

Example (Exam Tip): A dumper costs ₹5 crores and generates ₹1.5 crores annually. Payback = 5 ÷ 1.5 ≈ 3.3 years.

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H3: DGMS Exam Relevance

• Application in safety: Managers must justify investment in safety gear, support systems, dust suppression units, etc.
• Typical questions:
  • Define capital budgeting and its methods.
  • What is NPV? How is it applied in mining?
  • Explain importance of financial planning for mine safety.
• DGMS expects understanding of decision-making, resource allocation, and cost-safety balance.

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Quick One-Liners (Revision)

• Mining = capital intensive.
• Financial management = optimum allocation + monitoring.
• Capital budgeting = planning long-term investments.
• Payback = time to recover cost.
• NPV = PV(inflows) – PV(outflows).
• IRR = rate at which NPV = 0.
• Benefit-Cost Ratio >1 → project feasible.
• DGMS exam: focus on safety-related financial planning.

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📝 Descriptive Model Answer
Q: What is capital budgeting? Explain its importance in mining with methods used for evaluation.

Answer:Capital budgeting is the process of evaluating long-term investments in mining projects. Since mining requires heavy investment in equipment, development, and safety, capital budgeting ensures resources are allocated efficiently. Methods include Payback Period (time to recover investment), Net Present Value (NPV, difference between PV of inflows and outflows), Internal Rate of Return (IRR, discount rate where NPV=0), and Benefit-Cost Ratio (ratio >1 indicates acceptance). In mining, capital budgeting supports decisions like purchase of dumpers, installation of dust suppression systems, or opening new sections. It ensures projects are financially viable while complying with DGMS safety norms.

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🎯 25 MCQs – Financial Management & Capital Budgeting
Q1 Capital budgeting deals with:

A. Daily wage calculation
B. Long-term investment decisions
C. Office stationery purchases
D. Routine safety inspection
E. Payroll
Answer: B.
Solution: Capital budgeting is for long-term investments.

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Q2 Mining industry is described as:
A. Low-cost
B. Labour-only
C. Capital intensive
D. Risk-free
E. Service oriented
Answer: C.
Solution: Requires heavy capital investment.

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Q3 Which method ignores time value of money?
A. NPV
B. IRR
C. Payback period
D. Discounted cash flow
E. Benefit-cost ratio
Answer: C.
Solution: Payback does not account for TVM.

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Q4 NPV > 0 means:
A. Project is loss-making
B. Project is acceptable
C. Project must be rejected
D. Cannot decide
E. Always risky
Answer: B.
Solution: Positive NPV → profitable.

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Q5 IRR is:
A. The interest rate on loans
B. Discount rate where NPV=0
C. Always 10%
D. Payback time
E. Ratio of inflows to outflows
Answer: B.
Solution: IRR equates inflows & outflows.

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Q6 Benefit-Cost Ratio >1 means:
A. Reject project
B. Accept project
C. Postpone project
D. Losses likely
E. Ignore calculation
Answer: B.
Solution: >1 = feasible project.

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Q7 Which is NOT a capital budgeting technique?
A. Payback period
B. NPV
C. IRR
D. Safety audit
E. Benefit-cost ratio
Answer: D.
Solution: Safety audit is not financial evaluation.

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Q8 Payback period of 4 years means:
A. Returns double every year
B. Initial investment recovered in 4 years
C. No return in 4 years
D. IRR = 4%
E. NPV = 4
Answer: B.
Solution: Payback = time to recover initial cost.

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Q9 Financial management ensures:
A. Overspending
B. Optimum resource allocation
C. Ignoring safety cost
D. Higher risks
E. Random spending
Answer: B.
Solution: Ensures optimum allocation.

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Q10 NPV is calculated using:
A. Simple interest
B. Discounted cash flows
C. Wages data
D. Geological reserves
E. None
Answer: B.
Solution: NPV = discounted cash inflows – outflows.

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Q11 In mining, capital budgeting is important because:
A. Mines need huge investment in equipment & safety
B. Labour cost is low
C. Daily decisions only
D. Very short-term projects
E. Always risk-free
Answer: A.
Solution: Mines are capital intensive.

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Q12 Which project should be selected if resources are limited?
A. Project with lowest NPV
B. Project with highest NPV
C. Project with lowest IRR
D. Random project
E. All rejected
Answer: B.
Solution: Higher NPV → better project.

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Q13 IRR greater than cost of capital means:
A. Project is rejected
B. Project is accepted
C. Neutral decision
D. Losses likely
E. None
Answer: B.
Solution: IRR > cost → accept.

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Q14 A project costs ₹5 crore, generates ₹1 crore/year. Payback =
A. 2 years
B. 3 years
C. 4 years
D. 5 years
E. 6 years
Answer: D.
Solution: 5 ÷ 1 = 5 years.

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Q15 Time value of money means:
A. Money value constant
B. Present money more valuable than future money
C. Future money = more valuable
D. Value never changes
E. None
Answer: B.
Solution: TVM principle → earlier money = higher value.

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Q16 Which is a shortcoming of Payback method?
A. Ignores safety
B. Ignores TVM & cash flows after payback
C. Ignores IRR
D. Ignores geology
E. Ignores production
Answer: B.
Solution: Payback = simple, ignores TVM.

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Q17 Capital budgeting helps managers to:
A. Decide long-term investments
B. Decide daily attendance
C. Write blasting permits
D. Conduct ventilation survey
E. Draft wages
Answer: A.
Solution: Deals with major capital allocation.

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Q18 Which project has higher financial priority?
A. NPV ₹10 lakh
B. NPV ₹1 lakh
C. NPV –₹5 lakh
D. Any project
E. None
Answer: A.
Solution: Higher NPV → higher priority.

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Q19 Capital rationing means:
A. Unlimited funds
B. Limiting investment due to scarce funds
C. Borrowing always
D. Ignoring NPV
E. Ignoring IRR
Answer: B.
Solution: Limited capital → select best projects.

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Q20 IRR is compared with:
A. Cost of capital
B. Geological reserves
C. Wage levels
D. Ventilation cost
E. Safety inspections
Answer: A.
Solution: IRR must exceed cost of capital.

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Q21 Which factor is not considered in capital budgeting?
A. Cash inflows
B. Cash outflows
C. Time value of money
D. Manager’s salary only
E. Risk of project
Answer: D.
Solution: Salary is operational, not investment flow.

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Q22 Safety investments like dust suppression are justified through:
A. Capital budgeting
B. Mines Rules
C. Pay rolls
D. Wage slips
E. None
Answer: A.
Solution: Safety projects require capital budgeting justification.

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Q23 Which financial tool is most accurate for mining projects?
A. NPV
B. Payback
C. Random guess
D. Wage slip
E. None
Answer: A.
Solution: NPV considers TVM and profitability.

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Q24 Break-even analysis relates to:
A. Cost & revenue
B. Geology & reserves
C. Safety only
D. Labour strength
E. None
Answer: A.
Solution: Break-even = point where cost = revenue.

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Q25 Main objective of financial management in mining:
A. Maximize output with cost control & safety compliance
B. Ignore safety costs
C. Only short-term wages
D. Random investments
E. Reduce legal compliance
Answer: A.
Solution: Balance output, cost, and safety.

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