ESTIMATION AND VALUATION Valuation

Introduction

 Valuation is the technique of estimating or determining the fair price or value of a property
such as building, factory, other engineering structures of various types land etc. Hence, by
valuation, the present price or value of a property is determined.
 In other words, valuation is an art of judgment based on experience and relevant statistical
data to forecast the value of a property at present.
 The present value of a property may decide by its selling price or income or rent it may
fetch. The value of the property depends on its structure, life, maintenance, location, bank
interest, legal control, etc. The value also depends on supply or demand and the purpose
for which valuation is required, and continually varies with age, physical state and
characteristics of the property itself.
 Cost means original cost of construction while value means the present value (saleable
value) which may be higher or lower than the cost.

Purpose of Valuation:

The main purpose of valuation is as follows;

1. Buying or selling of property

2. For mortgage as security of loan
3. For determination of rent
4. For tax fixation or assessment of taxes
5. For compulsory acquisition
6. For fixation of insurance premium
7. To determine speculation i.e. more than fair price in selling
8. To determine betterment charges i.e. more than fair price in buying
9. For probate
10. For partition of a property
11. To determine the compensation for any loss due to E/Q, war etc.

Principle of valuation:

 When resorting to valuation of any property a valuator thrust is expert in the trade. He
must have scored knowledge of planning designing & construction of the property. He
should be aware of administrative laws wire town planning laws, rent, restrictor acts,
local taxes etc.

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ESTIMATION AND VALUATION Valuation

 Following principles should be observed at the time of evaluating fair & reasonable value of
a property.
1. Cost depends upon the supply & demand of property.
2. Cost depends upon its design, specification of the materials used and location of the
property.
3. Cost varies with the purpose for which valuation is made.
4. Cost is affected by the age of the property and its physical conditions.
5. In valuation, a vender must be willing to sell and the purchaser willing to buy.
6. Present & future use of any property should be given due weight age in valuation.
7. Cost analysis must be based on statistical data as it may sometime require evidence
in the court.

Terms used in valuation:

 Following are the terms commonly used in valuation;
1. Value & Cost
2. Book value
3. Assessed value
4. Distress value or forced sale value
5. Replacement value
6. Ratable value
7. Potential value
8. Annuity
9. Perpetual annuity
10.Differed annuity
11.Scrap value
12.Salvage value
13.Gross income
14.Outgoings
15.Net income
16.Capitalized value
17.Year's purchase
18.Sinking fund
19.Depreciation
1) Value & Cost
 Value indicates the present market value of any property which may be higher or lower
than the cost of construction, where as the cost means actual cost of construction.
 The value is fluctuating in nature whereas cost is a constant which required for the
construction, and the value depend upon the;

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ESTIMATION AND VALUATION Valuation

 Supply & demand of the property.

 Location of the property.
 Pose of valuation etc.
2) Book Value:
 It is the original investment shown in the account books of a company on its assets
including properties and machinates. Thus, the book value will be reduced year to year
depending upon depreciation and will be only the scrap value at the end of the utility
period.
 Book value is applicable on building and movable properties but not on land.
 Book value of the property can be determined as,
Book value = Original cost – total depreciation up to the previous year.
3) Assessed Value:
 It is the value of any property recorded in the record of local authority which is used for
the purpose of determining the various taxes to be collected from the owner of the
property.
 Generally, the assessed value is determined from the gross annual rent at which the
land or building might to be let after allowing a factor of 10% for repair.
4) Distress value or forced sale value:
 When a property is sold at a lower price than the market value of that time, it is said to
have a distress value.
 Such distress value may be due to any of the following reason;
i. Financial difficulties of the seller.
ii. Insufficient knowledge about the market value.
iii. Quarrel among partners.
iv. Court decree
v. Panic due to war or riots or civil commendation.
5) Replacement value:
 It is that value of a property or its services calculated on the prevailing market rate to
replace the same.
6) Ratable value:
 It is the net annual letting value of a property, which is obtained after deducting the
amount of yearly repairs from the grass income. Municipal & other taxes are charged on
the ratable value of the property.
7) Potential Value:
 Some property like land has an inherent value which may go on increasing due to the
passage of time or can fetch more return if used for some alternative purposes. This
inherent value is known as potential value.
 It includes the following;

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ESTIMATION AND VALUATION Valuation

i. Beneficial present use of land.

ii. Better layout than the existing one.
iii. Better suitability for a different purpose.
iv. Future usefulness.
8) Annuity:
 It is defined as the annual periodic payments for repayment of the capital amount
invested in a property or in some other form of investment by a party.
 These annual payments are either paid at the beginning of the year or at the end of the
year for a specified number of years.
9) Perpetual Annuity
 If the payments of annuity continue for indefinite period, it is known as perpetual
annuity.
10) Differed Annuity
 If the payment of annuity begins at some future data after a number of years, this is
known as differed annuity.
11) Scrap Value
 Scrap value is the dismantled materials value of a property at the end of its utility period
and absolutely useless except for sale as scrap. The value of dismantled material after
deducting the cost of demolition gives scrap value.
 The scrap value of a building is usually considered 10% of the cost of construction. In the
case of machineries, scrap value is the value of metal only or the value of the dismantled
parts.

12) Salvage Value

 It is the value of any property at the end of its utility period without being dismantled.
For eg. A machine after the completion of its usual life span or when it becomes
uneconomic may be sold and one may purchase the same for use for some other
purpose, the sale value of the machine is salvage value. It doesn't include the cost of
removal sale etc.
13) Gross Income
 It is the total revenue relished from a property either as rent or lease money during a
year. Gross income is the total income or receipt from all sources without deducting the
outgoing necessary for taxes, maintenance, operation replacement etc.
14) Outgoing
 These are the expenses incurred to maintain the property by undertaking periodic
repairs. It also include the taxes levied by the government or local authority on that
property sinking fund, management or collection changes and other miscellaneous
charges which are borne by the owner.

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ESTIMATION AND VALUATION Valuation

15) Net Income

 This is the saving or the amounts left after deducting all outgoings, operational and
collection expenses from the gross income or receipt, i.e.
Net Income = Gross income – outgoings
16) Capitalized Value
 It is defined as that amount of money whose interest at the highest prevailing rate of
interest will be equal to the net income from the property in perpetuity (for an
indefinite period or for a specified period)
 To determine the capitalized value of a property it is required to know the net income
from the property and the highest prevailing rate of interest.
 Further
Capitalized value = Net Income x Year purchase (Y.P.)
17) Year's Purchase (Y.P.)
 It is defined as the capital sum (i.e. capitalized value) required to be invested in order to
receive an annuity of Rs. 1.00 at the prevailing rate of interest. For eg, for 4% interest
per annum, to get Rs. 4.00 it requires Rs. 100.00 to be deposited in a bank. But to get Rs.
1.00 per year it will be required to deposit 1/4th of Rs. 100 i.e. 100/4 = Rs. 25.00
100
Thus, Year's purchase =
Rate of interest

Num – 1:
Find the capitalized value of a property fetching a net annual rent of Rs. 1500/- when the
highest rate of interest prevalent is 6%.
Solution,
Net income = Rs. 1500.00 per Annum
Highest rate of interest = 6%
Let, capitalized value = x

By Defn, x × 6 %=Net income

= x × 6 %=1500
1500
x=
6%
¿25000.00 Answer

Num – 2

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ESTIMATION AND VALUATION Valuation

A building in a 'A' class city is let at rent @ Rs. 5000 per month. The outgoing of the property
is estimate to 15% of the gross income. Calculate the capitalized value of the property if the
present rate of interest is 6% and life of the property is 50 yrs.

Solution:
Net income = Gross income – outgoings
Here,
Gross income = 5000 x 12 = Rs 60000.00
Outgoing = 15% of gross income = 15% x 60000
= Rs 9000.00
Net income =Rs 60000 – 9000 = Rs 51000
Further,
100 100
Year's purchase (Y.P.) = =
Rate of interest 6

Then,
Capitalized value = Net income x Y.P.
100
= 51000x
6
= 850000/- Answer

18) Sinking Fund

 It is a fund which is built up for sole purpose of replacement or reconstruction of a
property when it loses its utility either at the end of its life span or becoming obsolete.
 The fund is regularly deposited as installments in a bank or available for the
replacement on the expiry of utility period of the property.
 The calculation of sinking fund depends upon the life span of a property (such as
building, machineries etc) and the rate of interest. The sinking fund is generally
calculated for 90% of the cost of construction because remaining 10% will be recovered
by the scrap value when the life of the property is over.
 The amount of installment of the sinking fund can be worked out as under,
Let, n – utility period or life of the property (yrs.)
Sn – sinking fund to be accumulated in 'n' yrs.
R – Rate of interest in decimal (i.e. 7% = 0.07)
S – Yearly installment of the sinking fund.

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ESTIMATION AND VALUATION Valuation

Now,
Sinking fund at the end of 1st yr, S1 = S
Accumulation of sinking fund at the end of 2nd yr., S2 = S + S (1+R)
Accumulation of sinking fund at the end of 3rd yr., S3 = S + S(1+R) + S(1+R)2
Accumulation of sinking fund at the end of nth yr.,
Sn = S + S(1+R)+S(1+R)2+S(1+R)3 + ……………+ S(1+R) n-1 …………………(1)

Multiplying by (1+R) in both sides, we get,

Sn (1+R) = S(1+R) + S(1+R)2 + S(1+R)3 + …………… S(1+R) n …………..(2)
Subtracting (2) from (1), we get,
Sn – Sn (1+R) = S – S (1 + R)n
Or, Sn (1 – 1 – R) = S [ 1-(1+R)n]
Or, Sn x R = S [ (1 + R)n – 1]
Or Sn = S ¿ ¿
Or S =¿

Coefficient of sinking fund = yearly installment of sinking fund

If Sn = 1
R
Sc = , called coefficient of sinking fund.
¿¿
S = Sn x Sc

Num – 3
The sinking fund amount of a property is estimated to Rs. 50000 whose future life is 20
years. Find the year's installment of sinking fund which should be set aside @ 5% interest
rate.
Solution:
Here, Life of the property (n) = 20 yrs.
Accumulated sinking fund (Sn) = 50000
Rate of interest (R) = 5% = 0.05

We have,
S = Sn x S C
R 0.05
Where, SC = = = 0.03024
¿¿ ¿¿
Then,
Yearly installment of sinking fund (S) = 50000 x 0.03024
= Rs 1512 per year Answer
Num – 4

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ESTIMATION AND VALUATION Valuation

A property has been purchased by a person at a cost of Rs. 40,000 excluding the cost of
land. Determine the amount of sinking fund annually deposited at the rate of 5% compound
interest. Assume the future life of the property as 30 years and the scrap value as the 10%
of the cost of purchase.

Solution,
Here, cost of purchase = 40,000
Future life of the property (n) = 30yrs
Rate of interest (R) = 5% = 0.05
Scrap value = 10% of the cost of purchase

Now,
Total amount of sinking fund to be accumulated at the end of 30 yrs is,
Sn = 90% of 40,000
= 36,000.00
Then, annual installment of sinking fund is given by,
R
S = S n x Sc Sc = n
(1+ R) −1
R
= Sn x n
(1+ R) −1
0.05
= 36,000 x 30
(1+0.05) −1
= 544.35 Answer
19) Depreciation
 Depreciation may be defined as the gradual decrease or loss in the value of a
property because of constant structural deterioration, use, wear & tear, decay etc.
Thus, the value of a building or structure will be gradually reduced due to its use,
constant wear & tear, and a certain percentage of the total cost may be allowed as
depreciation to determine its present value.

Types of Depreciation:
 Two types of depreciation
A) Physical deprecation
- Due to wear and tear
- Action of time & natural forces (atmospheric)

B) Functional depreciation
-Due to inadequacy (space limit)

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ESTIMATION AND VALUATION Valuation

-Obsolescence (old fashion &design)

Obsolescence
 The value of the property or structures become less by it's becoming out dated in
style in structure in less by etc. because of change in design pattern, fashions living
habits of its inhabitants and thus it losses it functional utility and this is termed as
obsolescence Hence even the property is physically sound it may become
functionally inadequate and its economical return becomes less.
 It is very difficult task to predict obsolescence.
 Loss due to calamities like earthquakes, floods etc are also included in the
obsolescence.

Method of determining the rate of depreciation

The rate of depreciation can be determined by using either of the following methods.
a) straight line methods
b) constant percentage methods or declining balance method
c) sinking fund methods
d) quantity survey methods

a) Straight line methods.

In this methods it is assured that the property loses its value by the same amount every
year it’s a fixed amount of the original cost is lost every year so that at the end of the
utility period only the scrap value (or salvage) is left.

Annual depreciation (D) = original cost-scrap value

Life in yrs

c−v
D=
n
Where
D = Annual depreciation
C = Original cost
V = Scrap ( or salvage ) Value
n = utility period or life of the property (yrs)

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ESTIMATION AND VALUATION Valuation

b) Constant percentage methods or declining balance method:

In this method, it is assumed that the property will loss its value by a constant
percentage of its value at the
D= Percentage rate of annual depreciation or constant in decimal
C= original cost
V= scrap (or salvage) value
n= life of the property (yrs)

Now,
At the end of use year the value of property= c(1-D)
2nd yrs ,, ,, ,, c(1-D)(1-D)=c(1-D)2
rd
3 yrs ,, ,, ,, c(1-D)3
th
n Yrs ,, ,, ,, (v) =c(1-D)n
V
or, 1−D=[ ]1/n
c
V
D=1+[ ]1/n
c
c) Sinking fund methods
In this method the depreciation of property is assured to be equal to the annual sinking
fund there on up to that date, which is supposed to be invested on interest bearing
investment. If A is the annual sinking fund and b, c, d etc are interest on the sinking fund
for subsequent years and
C = total original cost, then
At the end of Depreciation Total Depreciation Book value
for the year
st
1 year A A C-A
nd
2 year A+B 2A + b C – (2A + B)
rd
3 year A+C 3A + B + C C – (3A + B + C)
th
4 year A+D 4A + B + C + D C – (4A + B + C + D)
And so on….

d) Quality survey method

 In this method, the property is studied in detail and loss in value due to life, wear & tear,
decay, obsolescence etc are worked out. Each and every step is based on some logical
ground without any fixed percentage of the cost of the property. Only experienced
value can work out the amount of deeper- creation and present the value of a property
by this method.

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ESTIMATION AND VALUATION Valuation

Determination of depreciation as per life of building.

For a building whose life is considered as 80 yrs, it well maintained the following may be
reasonable depreciation for practice purpose.
Period Depreciation per year Total depreciation
For1st 5yrs (0to 5yrs) nil nil
For next 5 yrs (5to10 yrs) @0.5% per year 2.5%
For next 10yrs (10to 20yrs) @0.25% 7.5%
For next 20yrs (20to40yrs) @1% 20%
For next 40yrs (40to80yrs) @1.5% 60%
Total 90%
10% represent the net scrap value on dismantling at the end the utility period.

Methods of valuation
The following are the different methods of valuation.
1, Rental method
2, Profit based method
3, Cost based method
4, Development based method
5, Depreciation method
6, Plinth area method
7, Capital value comparison method

1) Rental Method
 In this method the rental income is calculated after deducting all outgoing
from the gross rent, Years purchase is calculated after adopting the current
bank interest and then capitalized value of the property is worked out.
 To work the capitalized value by rent return method, the following
information is required to be collected.
 Land & Its tenure. Area of land & whether it is a free hold or on lease.
 Cubic contents of the building. Length width & height of the constructed
area.
 Future life of the building: Expected future life to account for singling
fund.
 Gross rent: Real rent it the property is let out otherwise it is calculated
from cubical contents.

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ESTIMATION AND VALUATION Valuation

 Outgoings: Total amount of outgoings such as towards takes collection

charges, repair & maintenance etc.
 Year's purchase (Y.P.): It is worked out by knowing the rate of interest,
life of the property and sinking fund coefficient.
 Capital repairs required.
 Value of land from records.
Num – 5
A RCC framed structure building having cubic content of 1400m 3 was constructed 15 yrs.
Back on a free tenure measuring about 1100m2. The building fetchers a rent of about Rs.
1400 per month. What amount will you recommend for advance loan to the owner against
the mortgage if the rate of land in that area is Rs. 500/m2.

Expenses:
Insurance premium – Rs. 900.00 per annum
Management & collection tax – 8% of gross rent
Municipal tax – 30% of gross rent
Repair – 5% of gross rent
Assume that the future life is 60yrs.
Rate of interest is 8% & redemption of capital is 5%.

Solution,
Here,
Gross annual rent = 1400.00 x 12 = 168000.00
Outgoings
i) Insurance premium = 900.00
ii) Management & collection tax = 8% x 168000.00 = 13440.00
iii) Municipal tax = 30% x 168000.00 = 50400.00
iv) Repair = 5% x 168000.00 = 8400.00
Total outgoings = 73140.00
Net rental income = Gross rent – outgoings
= 168000.00 – 73140.00
=Rs 94860.00

To determine year's purchase (Y.P.)

Here, IP = 8% = 0.08
R
And, coefficient of sinking fund = ; n = 60yrs.
¿¿
0.05
= = 0.0028
¿¿

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ESTIMATION AND VALUATION Valuation

1 1
Then, Y.P. = , = = 12.077
I P+ I c 0.08+0.0028

Capitalized value = Net rent x Y.P.

= 94860.00 x 12.077
= 1145624.22
Value of land = 1100.00 x 500.00
= 550000.00
∴ Total value of the property = 1145624.22 + 550000.00
= 1695624.22

Now, 60% (50 – 70%) of the value of property can be recommended for advance loan
against the mortgage of the property i.e.
Recommended advance loan = 60% of 1695624.22
= 1017374.53 Answer

2) Profit based method

 This is very much similar to the rental method of valuation and is most applicable for the
buildings like hotels, cinemas, shop etc.
 In this method, the net profit is worked out after deducting all possible outgoing
including interest of capital investment & also remuneration of labor rendered by
owner, and multiplied by Y.P. to get the capitalized value of the property.
Num – 6,
Worked out the valuation of a cinema hall with the following data
Cost of land = Rs. 120000.00
Gross income = Rs. 750000.00

Expenses undergone per annum,

i. To run cinema hall including staff salary, electricity charges, municipal taxes & printing
etc 30% of gross income.
ii. Repair & maintenance of machinery plant & equipment is 5% of their capital cost which
is Rs. 950000.00.
iii. Sinking fund for machineries whose life is estimated as 25 years, at 4% after allowing
10% scrap value.
iv. Insurance premium is Rs. 10000.00 per annum.
v. Annual repair of hall is 2% of gross income.

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ESTIMATION AND VALUATION Valuation

Assume year's purchase for 60 years at 8% and redemption of capital at 4%.

Solution,
Gross income = 750000.00

Outgoing:
i) To run cinema hall 30% x 750000.00 = 225000.00
ii) Repair & maintenance of machinery plant & equip. 5% of 950000.00 = 47500.00
R
iii) sinking fund for machineries (s) = Sn ×
¿¿
Where Sn = 90% = 850000.00
0.04
S = 855000.00 x = 20530.23
¿¿
iv) Insurance premium = 10000.00
v) Annual repair of hall = 2% x 750000.00 = 15000.00
Total outgoing = 318030.23
Net profit (i.e. net income) = Gross income – Total outgoings
= 750000.00 – 318030.23
= 431969.77
Now,
R
Coefficient of sinking fund (Ic) = ; n = 60 years.
¿¿
0.04
(Ic) =
¿¿
= 0.0042
1 1
Y.P. = = = 11.88
I p + I C 0.08+0.0042
Then,
Capitalized value = Net profit x Y.P.
= 431969.77 x 11.88
= 5131800.90
Value of land = 120000.00
∴ Total value of the property = 5131800.90 + 120000.00
= 5251800.90 Answer

3) Cost based
 In this method, the actual cost incurred in incurred in constructing the building or in
possessing the property is taken as basis to determine the value of property. In such
cases, necessary depreciation should be allowed and the points of obsolescence should
also be considered.

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ESTIMATION AND VALUATION Valuation

4) Development method of valuation

 This method of valuation is used for the properties which are in the undeveloped on
party developed stage. For eg, if a large place of land is required to be divided into the
plots after providing roads, parks etc, this method of valuation is adopted. Further, in an
existing building if some improvements are to be made the development method of
valuation is used.
 In this method, the valuation of the property may be worked out its renovation. Then,
the net income is multiplied by the Y.P. which gives the anticipated capitalized value.

Num – 7
A city corporation has to acquire an area of 350000 m2 for the development of a new
colony. After developing the area, it is proposed to be sold at Rs. 45.00/m 2. Worked out the
maximum compensation which can be given to the owners whose land is to be acquired for
developing the colony, assuming,
I. The corporation establishment charge 15% of the sake price.
II. 40% area to be provided for roads, parks etc.
III. Colony improvement expenditure Rs. 7.00/m2
IV. Engineer's & Architects' fee 4% of the sale price.

Solution,
Here, the total area to be acquired = 350000 m2
Area to be provided for road/parks = 40% x 350000 = 140000 m2
Net area available for making plots for sale = 350000 – 140000 = 210000.00 m2
Proposed rate of selling = Rs. 45.00/m2
Gross income from plots selling = 210000.00 x 45.00
= Rs. 9450000.00

Outgoings,
I. Establishment charges = 15% x 9450000.00 = 1417500.00
II. Colony improvement expenditure = 350000.00 x 7.00 = 2450000.00
III. Engineers & Architect's fee = 4% x 9450000.00 = 378000.00
Total outgoings = 4245500.00
Then,
Maximum price of the undeveloped land = 9450000.00 – 4245500.00
= 5204500.00
5204500.00
Maximum possible compensation which can be given to the land owners =
350000.00

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ESTIMATION AND VALUATION Valuation

= Rs. 14.87/m2 Answer

5) Depreciation method of valuation:

 According to this method, the depreciated value of a building is directly calculated with
the help of following formula,

[ ]
n
100−r d
I =P
100
Where ,
D=¿depreciated value of a building structure after 'n' years.
P = cost of the building at present market rate if new
Rd = fixed percentage of depreciation (rate of depreciation)
(r = rate, d = depreciation)
The no. of years the building has been constructed.

Calculated,
By depreciation method of valuation, the value of a building structure only may be
determined.

Building having life value of rd

100 years 1.0
75 years 1.3
50 years 2.0
25 years 4.0
20 years 5.0

Num – 8
What is the present value of the property having area of land 270 m 2 with 25 yrs. Old, first
class building with a plinth area of 100 m2 . The building is provided with water supply and
electric filtering. Assume life of the building as 100 yrs., r d = 1. Also assume cost of land is
1500.00/m2. Take present value of the some building is Rs. 8000.00/m 2.

Solution
Value of the building at present (P) = 8000.00 x 100.00
= 800000.00

Num – 7

BY: Er. Kanchan Bhatta Page 16

ESTIMATION AND VALUATION Valuation

A city corporation has to acquire an area of 350000 m2 for the development of a new
colony. After developing the area, it is proposed to be sold at Rs. 45.00/m 2. Work out the
maximum compensation which can be given to the owners whose land is to be acquired for
developing the colony, assuming,
I. The corporation establishment charge = 15% of the sake price.
II. 40% area to be provided for roads, parks etc.
III. Colony improvement expenditure = Rs. 7.00/m2
IV. Engineer's & Architects' fee = 4% of the sale price.

Solution
The total area to be acquired = 350000 m2
Area to be provided for roads / parks = 40% x 350000
= 140000m2
Net area available for making plots for sale = 350000 – 140000
= 210000.00m2
Proposed rate of selling = Rs. 45.00/m2
Gross income from plots selling = 210000.00 x 45.00
= Rs.9450000.00

Outgoings
I. Establishment charges = 15% x 9450000.00 = 1417500.00
II. Colony improvement expenditure = 350000.00 x 7.00 = 2450000.00
III. Engineers & Architect's fee = 4% x 9450000.00 = 378000.00
Total outgoings = 4245500.00
Then,
Maximum price of the undeveloped land = 9450000.00 – 4245500.00
= 5204500.00
5204500.00
Maximum possible compensation which can be given to the land owners =
350000.00

= Rs. 14.87/m2 Answer

6) Plinth area method of valuation
 If it is not possible to estimate correctly the quantity of different items of work, the
plinth area method of valuation is used.
 In this method, the resent plinth area rate of similar building in the same locality with
the same specification is worked out, multiplied with the plinth area of the building
whose valuation is to be done and suitable depreciation is allowed.

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ESTIMATION AND VALUATION Valuation

Num – 9
A free hold residential property having plinth area of 100m 2 constructed 20 years ago on a
plot of land measuring 500m2 is proposed to be purchased by 'A' for his use. The present
rate of construction of the similar building is Rs. 9000.00/m 2 of the plinth area and cost of
land is Rs. 2000.00/m2. Advice 'A' at what cost he should purchase the property.

Solution,
Here, cost of land = 500.00 x 2000.00 = 1000000.00
Cost of building = 100.00 x 9000 = 900000.00

To determine the depreciation,

Method – straight line method
Age of building = 80 yrs.
Scrap (or salvage) value = 10% of the cost of building
Then,
c−v
Annual depreciation (D) =
n
900000.00−10 % × 900000.00
¿
80
= 10125.00 per annum
Total depreciation for past 20 yrs. = 10125.00 x 20
= 202500.00
The present value of the building = 900000.00 – 202500.00
= 697500.00
∴Total value of the property = value of land + present value of the bldg
= 1000000.00 + 697500.00
= 1697500.00
Hence, 'A' is advised to purchase the property at the cost of Rs. 1697500.00 Answer

7) Capital value companion method:

 This method is used for the valuation of the property, when the rental value of the
property is not available but sale records of similar buildings are available.
 In this method, capitalized value of the property is worked out by direct comparisons
with other capitalized value of similar property in the same locality, whose sale records
are available.

Num 10

BY: Er. Kanchan Bhatta Page 18

ESTIMATION AND VALUATION Valuation

An owner has decided to sell his vacant property of 30 years old. Single storied building
having a total plinth area of 110m2. The cost of land is 300000.00 compared with adjoining
areas. There is no comparable instance of lathing value available in the locality but the
present plinth area rate to constant such a new building has been determined from current
sale price which is Rs. 5500.00 per m2. What should be the sale price of the property having
total life of 80 years and annual sinking fund interest is 5%.

Solution,
Cost of building = 110.00 x 5500.00 = 605000.00
Sinking fund coefficient for 80 yrs. is
R
Sc = ; n = 80 years.
¿¿
0.05
=
¿¿
= 0.001
We know,
R
S = Sn x
¿¿
Where, s = yearly installment of the sinking fund
Sn = sinking fund to be accumulated in 'n' years.
If s = Rs. 1.00 per Annam then,
Sn for 30 yrs. = ¿ ¿ x s
= ¿¿ x 1
= 66.44
∴ Rate of depreciation in 30 yrs. = 0.001 x 66.44 = 0.06644
Totaldepreciation in 30 years = 605000.00 x 0.06644
= 40196.20
Then,
Depreciated value of the building = 605000.00 – 40196.20
= 564803.80
Also,
Value of land = 300000.00
Hence,
Sale price of the property = Depreciated value of building + value of land
= 564803.80 + 300000.00
= 864803.8 Answer

Num – 11 (Depreciation – straight line method)

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ESTIMATION AND VALUATION Valuation

The total cost of a new building is Rs. 1500000.00. Work out the depreciated cost of the
building after 20 yrs. by straight line method if the scrap value is Rs. 250000.00. Assume the
life of the building is 80 yrs.

Solution,
Here,
Original cost (c) = 1500000.00
Scrap value (v) = 250000.00
Life of the building (n) = 80 yrs.
Using straight line method =
original cost−scpra alue c−v
Annual depreciation = =
life∈ yrs . n

1500000.00−250000.00
=
80
= 15625.00 per annum
Total depreciation in 20 yrs = 15625.00 x 20 = 312500.00
∴ Depreciated cost of the building after 20 yrs = 1500000.00 – 312500.00
= 1187500.00 Answer

Num – 12 (Depreciation – Constant percentage method)

The present value of a kibrator machine is Rs. 30000.00. Work out the depreciated cost of
the machine at the end of 6 yrs, if the scrap value is Rs. 2500/-. Assume life of the machine
be 10yrs.

Solution,
Original cost (c) = 30000.00
Scrap value (v) = 2500.00
Life of the machine (n) = 10 yrs.
By using constant percentage method of depreciation

()
1
v n
Percentage rate of annual depreciation (D) = 1 -
c

=1–(
30000 )
1
2500.00 10

= 0.22
∴value of property at the end of 6 yrs. = C [1 – D]6
= 6755.98 Answer

Num – 13 (Depreciation – Sinking fund method)

BY: Er. Kanchan Bhatta Page 20
ESTIMATION AND VALUATION Valuation

The cost of construction of a new building according to present market rate is Rs.
2500000.00 having life of 80 yrs. If the bldg. is 15 yrs. Old, determine the depreciation
amount which should be deducted from the cost of the new building @ 10% compounded
interest.

Solution,
Cost of building at present = 2500000.00
To determine the depreciation by sinking fund method
Sinking fund coefficient for 80 yrs.
R
Sc =
¿¿

0.10
= =0.000049
¿¿
We know,

R
S = Sn x
¿¿
Where, s = yearly installment of the sinking fund
Sn = sinking fund to be accumulated in 'n' years.
If s = Rs. 1.00 per Annam then,
Sn for 15 yrs. = ¿ ¿ x s
= ¿¿ x 1
= 31.77

Rate of depreciation in 15 yrs. = 31.77 x 0.000049

= 0.0016
∴ Total depreciation amount to be deducted = 2500000.00 x 0.0016
= 4000.00 Answer

Num – 14 (Year's purchase)

Work out the value of year's purchase (Y.P.) for an old building if its future life is 15 yrs. Rate
of interest on capital is 7% and rate if interest for sinking fund is 4%.

Solution
Here, rate of interest on capital (Ip) = 7% = 0.07
Rate of interest from sinking fund (R) = 4% = 0.04
Now,

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ESTIMATION AND VALUATION Valuation

R
Sinking fund coefficient (Ic) = ; n = 15 years
¿¿

0.04
=
¿¿
= 0.0499
1 1
Then, Y.P. = = = 8.34 Answer
I p + I C 0.07+0.00499

Repair:
 The repairs are required to be carried out every year to maintain a property in fit
condition.
 The amount to be spent on repairs depends on the age, contraction materials used in
the building etc.
 Usually 10 to 15% of the gross income or
 1 to 1.5% of the total cost of construction.

Management & collection charges

 It includes the expenses on rent collector, watchman, liftman, pump attendant etc.
 Usually 5% of gross rent.

Mortgage
 The owner if a property can borrow money (loan) against the security of his property.
Such advancement of money against any form of security is called mortgage.
 The person who takes the loan is known as 'mortgage'
 The person who advances the loan is known as 'mortgage'

Freehold property
A freehold property mean that the owner is in absolute possession of the property and he/she
can utilize the same in any manner under the prevailing riles & regulations for eg. he can
use the property by himself he can grant on lease or he can sell etc.
Leasehold property
It indicates the physical possession of the property and the use of it may be allowed by the
original owner (lesser) as per lease document the owner of a freehold property may give
permission to any other person to use his freehold which is known as giving property on
lease.

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ESTIMATION AND VALUATION Valuation

Valuation Report
The valuation report is divided into 3 parts
Part-1 Derails about the property
Part-2 Valuation calculation
Part-3 valuation declaration

Appendix: I) Introductory details

II) Floor plans
III) Technical details
IV) Land value
V)Area calculation
VI) Land ownership paper & other related paper
VII)Citizenship certificate .

Possible questions
1. You have been asked to prepare a valuation report of a property (land &building). Meenlion
various dates which you will collect as valuator.

Solution
As a valuator we will consider the following things and valuate the given land & building. For
this we will first take the introductory details as.
1. Location (street, ward no, town etc)
2. Plot no of land
3. Area of plot (According to land registration office)
4. Owner of the property this includes
a) owner's name
b) Father's name
c) Grand father's name
5. Age of owner
6. Current address of owner (tel. no it available)
7. Details of surrounding properties
a) North
b) South
c) East
d)West
8. Details of access road
a) Type

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ESTIMATION AND VALUATION Valuation

b) width
9. Distance of property from nearest commercial? Busy built-up are.
10. Site details
a) shape
b) Top graph
c) width of frontage
d) Depth
11. Site services
a) water supply
b) Electricity
c)Sewerage
12. Site constraints
a) Surcharge overhead
b) High lesion line
c) Noise
d) Pollution

Additional data
1. Purpose for which valuation is made
2. Bret description of the property
3. Is the property situated in residential commercial mixed industrial area?
4. Classification of the locality high class, middle class, poor class or mixed.
5. Is it freehold or leasehold land?
6. Are there any agreement of easement?
7. Is the building owner occupied / tenanted/ both?
8. Details of water supply & electricity charges are any to be borne by owner?
9. Has the tenant to bear the whole or part of the cost of repairs and maintop Nance?
10. What is the amount of property tax? Who is bearing it? Details with document proof.
11. Is the building insured? It so give amount for which it is insured and annuls & premium.
12. What was the method of construction?
13. Has the hole or a party of the land been notified for acquisition by government? It so
give date of notification rent.
14. Me of tenants? Lessee
Monthly or annual rent
15. Gross amount received for the whole property
16. Is any dispute between landlord and tenant regarding rent pending in a court of law.
17. Has any standard rent been fixed for the premises under any law relating to the control
of rent?

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ESTIMATION AND VALUATION Valuation

18. sales:
Give instantaneous sales of property in the locality on separate sheets indicating the
name & address of the property, registration number, sales price and area of land sold.
2. Distinguish clearly between
a) sinking fund & depreciation
b) Salvage value & scrap value
c) Capitalized value & year's purchase
d) Rental method of valuation &development method of valuating

BY: Er. Kanchan Bhatta Page 25