6.

Valuation 1

1. What is meant by valuation? State its necessity.

Ans.
Valuation: Valuation is branch of quantity surveying which deals with the art of assessing
the present fair value of a property. Valuation of a property such as a land, building, factory
etc.
Necessity:
i. Buying and selling the property.
ii. Taxation.
iii. Rent fixation.
iv. Security of loans or mortgage.
v. Compulsory acquisition.
vi. Insurance.
vii. Wealth tax and estate duty.
viii. Assessment of stamp fees.
ix. Gift tax.
x. Partition.

2. Define value of a property. State its characteristics.

Ans.
Value is defined as the desirability of a thing, often in respect of some property such as
usefulness or exchangeability; worth, merit, or importance.

Characteristics of value:
i. Value changes from place to place.
ii. Value depends upon life of building, location of property.
iii. Value changes with respect to the returns expected.
iv. Value changes according to law of demand & supply.
v. Value is affected by natural disasters, riots etc.
vi. Value can be classified as market value, book value, scrap value salvage value.

3. Explain (state) the factors affecting value.

Ans.
The factors affecting value of a property are:
i. Forces of demand and supply: Few buyers as compared to a number of properties available
for sale in a locality will result in low prices for the property and vice a versa.
ii. Cost of construction: The present cost of construction affects the value due to rapid change
of price index in comparison with the rate of depreciation.
iii. Increase in population: Rise in population due to growth of new industries or influx or by
multiplication will result in heavy demand of land, buildings and properties.
iv. Riots, war, flood and other natural calamities: Due to insecure conditions values may drop
and remain so for a considerable period.
 6. Valuation 2

v. Improvement of Public schemes: The taking up of any public schemes like sewer lines,
water line, means of transportation will trend to make the area more attractive followed by
increase in and value.
vi. Interest on Banks: by lowering the bank interest rates, more money will be available for
investment in property and vice versa.
vii. Cost of labour.
viii. Inflation.
ix. Monopoly of a property in market.
x. Location of property.
xi. Returns from property.
xii. Life and age of building.

4. Define depreciation. State the various methods of calculating it. Explain any one.
Ans.
Depreciation: Depreciation maybe defined as a loss in value or utility of property. The loss
is due to wear and tear, decay, inadequacy and obsolescence.

Methods of calculating depreciation

i. Straight line method
ii. Constant percentage method or declining Balance method
iii. Sinking fund method
iv. Quantity survey method.

Straight line method: Assumption of this method is that the property loses its value by the
same amount every year. A fixed amount of the original cost is deducted every year. So that
at the end of utility period only the scrap value is left.
Annual depreciation (D) = (Original cost - Scrap value) / (Life in years)
D = (C - S) / N

5. Differentiate between: Annuity and Sinking Fund

Ans
Sr. Annuity Sinking fund
No.
1. It is the annual periodic payment for the It is the fund set aside every year for
capital amount invested. the purpose of reconstructing the
property after end of utility period.
2. The annuity is paid at the end of year or at Sinking fund which is invested in
the beginning of year. government securities after the end of
utility period.
3. Calculation of annuity depends upon rate Calculation of sinking fund depends on
of interest capital required. rate interest & life of building.
 6. Valuation 3

6. Differentiate between: Scrap Value and Salvage Value

Ans.
Sr. Scrap Value Salvage Value
No.
1. It is the value of dismantled material at It is the value at the end of utility period
the end of utility period without being dismantled
2. The materials are sold in part The whole unit is sold
3. It is about 10% of initial cost It may be different according to situation

7. Define ‘Year Purchase’ and ‘Sinking fund’.

Ans.
Year Purchase: It is the figure which when multiplied by the net income gives the
capitalized value of a property on the material date of valuation.
Capitalized value = Net Income x Year Purchase
Year Purchase is the capital sum required to be invested in order to receive an annuity of Rs.
100, at certain rate of interest.

Y.P. = 100 / rate of interest

8. State the meaning of salvage value and scrap value.

Ans.
Salvage value:
It is the estimated value of a built up property at the end of its useful life without being
dismantled.
This is generally accounted by deducting the depreciation from its new cost.

Scrap Value:
It is the value dismantled materials of a property at the end of its utility period, and
absolutely useless except for sale as scrap.
When it applies to an old building which has outlived its useful span of life and repairing for
reuse is not viable. The scrap value of a building is usually considered as 10 percent of the
cost of construction.

9. What do you mean by cost, price and value?

Ans.
Cost: It is the original cost of construction i. e. cost of material and labour.

Price: It is the amount of money paid to the seller by the purchaser of the property.

Value: It is the present market value which may not be necessary same as that of cost of an
item. It may be higher or lower than cost.
 6. Valuation 4

10. What do you mean by sinking fund? State its use. State one example.
Ans. Sinking fund:
An amount which has to be kept aside at fixed intervals of time, out of the gross income so
that at the end of the useful life of building, the fund should accumulate to the initial cost of
the property is called as sinking fund.

I = Si / ( 1 + i )n -1
Where, S = amount of sinking fund
i = rate of interval in decimal.
n = number of years required to create sinking
I = annual installment required

Use of Sinking fund:

1) Sinking fund will form the amount of replacement at the end of the utility period of the
property.
2) Sinking fund is required for payment of loan.

Example of Sinking fund:

Find the amount of annual sinking fund @ 3% to give Re1/- at the end of 10 years.
Solution:
I = Si / ( 1 + i )n -1
i = Rate of interest = 3% = 0.03
n = number of years = 10
I = (1 X0.03)/((1+0.03)10 -1)
= Rs. 0.0872/-

11. State the meaning of Speculative Value and Sentimental value.

Ans.
Speculative Value-
Some property dealers have their business of purchasing of properties and selling them at
profit after some time. the price at which such property is purchased with intention of selling
it again at profit, is known as Speculative Value

Sentimental value-
In some cases, some sentiments or feelings of the owner are attached and he does not desire
to sell even the buyer may pay much more than actual value of property. such offered price is
called as Sentimental value
 6. Valuation 5

12. Define outgoings. State various types of outgoings.

Ans.
Out goings: The expenditure or expenses which are to be incurred in connection with the
property, to maintain revenue from it is called as out goings.
These are generally assumed to be 30% of the gross income.

Various types of outgoings:

1. Municipal taxes: These are paid to the local authorities for the services like water supply,
sanitation etc. These taxes are calculated at certain percentage of rentable value of the
property.
2. Repairs: it is the amount spent for annual repair and maintenance to keep property in fit
condition. This amount is usually 1 to 1.5% of the total value of the property.
3. Sinking Fund: The fund created by regular periodic payment which accumulates at the
compound interest is called a sinking fund. This amount is used for reconstructions of the
building at the end of
utility period.
4. Management & collection charges: These are the charges which include expenses on
rent collector, chowkidar, sweeper etc. These may be 5 to 10 % of the gross rent.
5. Insurance: It is the premium paid by the owner of the property. It depends upon the sum
assured.

13. List out various factors affecting value of a property.

Ans.
Factors affecting value of a property:
1. Forces of demand and supply.
2. Cost of construction.
3. Increase in population.
4. Improvement of public schemes.
5. Interest on banks.
7. Cost of labour.
8. Life and age of building.

14. Differentiate between Market value and book value

Ans.
Sr. Market value Book value
No.
1 It is the value or amount of a property, It is the value or amount mentioned in
which may be obtained at any time the account book at the time of
from the open market purchase and can be obtained on
deduction done by depreciation.
2 Frequency of fluctuations are frequent. Frequency of fluctuations are not
frequent.
 6. Valuation 6

3 When market value is greater than book When book value is greater than market
value there is loss value there is profit.

Differentiate between Depreciation and Obsolescence

15.
Ans. Sr. Depreciation Obsolescence
No.
1 The physical loss in the value of the The loss of the property because of
property caused by its use life, wear, tear change in fashion, style, new inventions,
and decay, is called as depreciation. modern facilities etc. is called as
obsolescence.
2 Depreciation depends upon the age of the Obsolescence do not depends upon the
property. More is the life; more will be age of the property. The reduction in the
the depreciation. value of the property may be sudden.
3 Depreciation can be determined by Obsolescence cannot be calculated or
various methods. determined by only method.