UNIT III – VALUATION

QUANTITY SURVEYING, CONTRACTS & TENDERS – Lecture 15

Prof. A.V. Pendse

abhijeet.pendse@viit.ac.in
Department of Civil Engineering

BRACT’S, Vishwakarma Institute of Information Technology, Pune-48

(An Autonomous Institute affiliated to Savitribai Phule Pune University)
(NBA and NAAC accredited, ISO 9001:2015 certified)
 Objective/s of this session

1. Understand valuation and its types and how to prepare a

valuation report

Learning Outcome/Course Outcome

2. Explain valuation, types of values and prepare a valuation

Report on O-1 Format by applying Rental Basis, Land & Building
basis, Direct Comparison Method, Profit based method, Belting
of Land, Development method of valuation

Prof. A.V. Pendse, Department of Civil Engineering, VIIT , Pune-48 2

 Content – Unit III
Part –I
Valuation: Purpose of valuation. Meaning of price, cost, and value. Factors affecting Value.

Part-II
Types of value: Fair Market Value, Book Value, Salvage, Scrap Value, Distressed Value and
Sentimental Value. Concept of free hold and lease hold property.

Part-III
Estimation versus valuation. Methods of depreciation and obsolescence, Sinking Fund, Years
Purchase.

Part-IV
Methods of Valuation of Building: Rental Basis, Land and Building basis, Direct Comparison Method,
profit based method, Belting of Land, Development method.

Part-V
Numerical on valuation.

Part-VI
Numerical on valuation
Prof. A.V. Pendse, Department of Civil Engineering, VIIT, Pune-48 3
 Valuation
➢ Depreciation- Depreciation is the loss in the value of the property due to its use, life, wear & tear,
decay etc. This is an assessment of the physical wear and tear of the building or property and naturally
depends on its original condition, quality of maintenance and mode of use. Thus, the value of a building
or property decreases gradually up to the utility period due to its depreciation. The general annual
decrease in the value of a property is known as Annual Depreciation.

➢ Obsolescence – this may be defined as the loss in the value of property due to change in fashion, in
designs, in structure, inadequacy to present or growing needs, necessity for replacement due to new
inventions, etc. An apartment which becomes increasingly difficult to rent out is said to suffer from
obsolescence. Obsolescence may be a) Internal obsolescence; b) External obsolescence

➢ Internal Obsolescence – It may be due to 1) poor or eccentric original design; 2) change in type of
construction; 3) change in kind of construction; 4) change in utility demand

➢ External Obsolescence – It may be due to 1) poor original location; 2) specific detrimental influences
arise due to construction of factories, stackyards, proximity to public building, traffic locations and
noises; 3) zoning laws

Prof. A.V. Pendse, Department of Civil Engineering, VIIT, Pune-48 4

 Contd..Valuation
Difference between Depreciation and Obsolescence

Depreciation Obsolescence
1) This is the physical loss in the value of the 1) This is the loss in the value of the property
property due to wear and tear, decay, etc. due to change of design & fashion, change of
utility demand, etc.
2) It depends on its original condition, quality 2) Its depends on normal progress in the arts,
of maintenance & mode of use inadequacy to present or growing needs
3) This is variable according to the age of the 3) This is not dependable on age of the
property. More is the age more will be the building
amount of depreciation
4) There is different methods to calculate the 4)At present, there is no method to find out
amount of depreciation obsolescence

Prof. A.V. Pendse, Department of Civil Engineering, VIIT, Pune-48 5

 Contd..Valuation
Methods of Depreciation
Following are the methods of calculating depreciation:

1. Straight line method – In this method the property is assumed to lose value by a constant amount
every year and thus a fixed amount of original cost is written off every year so that at the end of the
term, when the asset is worn out, only scrap value remains.

Let C = original cost; Sc = Scrap value; n = life of the property in years

Then D = Annual depreciation = (C-Sc)/n

Example: The total cost of new building is Rs. 1,50,000. workout the depreciated cost of the building after
20 years, if the scrap value is Rs. 15,000, assuming life of the building is 80 years.

Prof. A.V. Pendse, Department of Civil Engineering, VIIT, Pune-48 6

 Contd..Valuation
Methods of Depreciation
1. Straight line method

Solution:

Annual depreciation D = (C-Sc)/n = (150000-15000)/80 = Rs. 1687.5

Depreciation in 20 years = 20 x 1687.5 = Rs 33750

Therefore, depreciated cost of building after 20 years = 150000-33750 = Rs. 1,16,250

Prof. A.V. Pendse, Department of Civil Engineering, VIIT, Pune-48 7

 Contd..Valuation
Methods of Depreciation
Following are the methods of calculating depreciation:

2. Constant percentage method or declining balance method – In this method, the property is assumed
to lose its value annually at a constant percentage of its book value

Let p = percentage rate of annual depreciation

C= original cost; Sc = scrap value; n = life of property in years

At the end of first year, the value = C – (p x C) = C(1-p)

At the end of second year, the value = C(1-p) – p[C(1-p)] = C (1-p) (1-p) = C[1-p]2

Therefore, at the end of nth year, the value is equal to Sc

Sc = C[1-p]n; so Sc/C = [1-p]n; i.e. (Sc/C)1/n = 1-p

Therefore p = 1 – (Sc/C)1/n

Prof. A.V. Pendse, Department of Civil Engineering, VIIT, Pune-48 8

 Contd..Valuation
Methods of Depreciation
2. Constant percentage method or declining balance method

Example – The present value of a machine is Rs. 20,000. Work out the depreciation cost at the end of 5
years, if the salvage value is Rs 2000. Assume life of machine as 16 years

Solution – The present value of a machine is Rs. 20,000. Work out the depreciation cost at the end of 5
years, if the salvage value is Rs 2000. Assume life of machine as 16 years

p = 1 – (Sc/C)1/n

p = 1-(2000/20000)1/16 = 1-0.866 = 0.134

Therefore, value of the machine at the end of 5 years = 20000[1-0.134]5 = Rs 9741.35

Prof. A.V. Pendse, Department of Civil Engineering, VIIT, Pune-48 9

 Contd..Valuation
Methods of Depreciation
3. Sinking fund method –

The underlying basic principle is that any prudent person would like to keep apart a small amount every
year in a safe security to take care of the depreciation in the immovable property. It is assumed that the
fund is built up by depositing a fixed annual amount in a long-term security which earns a reasonable rate
of interest as a recurring deposit account. The assumption, further, is that the rate of interest is such as is
available from absolutely safe long-term securities so that there is no risk of losing the accumulated sum.
The depreciation at any stage, during the life of the structures, is the amount accumulated in the fund up
to that stage.

Prof. A.V. Pendse, Department of Civil Engineering, VIIT, Pune-48 12

 Contd..Valuation
Methods of Depreciation
3. Sinking fund method –
Let us assume that an amount of Re 1 is proposed to be deposited in the sinking fund account every year
out of the earnings of the year from the property. Let us also assume that this amount is deposited at the
end of the relevant year. Let us further assume that the sinking fund account earns annual interest at i%.

Re 1 deposited at the end of the first year does not earn interest. It remains as Re 1 at the end of the first
year. It earns interest in the second year and becomes 1+ i at the end of the second year. This further
becomes (1+ i)2 at the end of the third year, (1+ i)3 at the end of the fourth year, and so on.
Thus,
• Re 1 deposited in 1st year becomes Rs (1+ i)n-1 in n years
• Re 1 deposited in 2nd year becomes Rs (1+ i)n-2 in n years
• Re 1- deposited in 3rd year becomes Rs (1+ i)n-3 in n years
• Re 1 deposited in (n -2)th year becomes Rs (1+ i)2 in n years
• Re 1 deposited in (n -1)th year becomes Rs (1+ i) in n years
• Re 1 deposited in nth year remains as Re 1 in n years
Prof. A.V. Pendse, Department of Civil Engineering, VIIT, Pune-48 13
 Contd..Valuation
Methods of Depreciation

3. Sinking fund method –

Now if we use the term Sn, to represent the total amount in the fund after n years are over,
Sn = (1+i)n-1 + (1+i)n-2+……..+ (1+i)2 + (1+i) + 1 ………….. (i)
Multiplying equation (i) by (1+ i)
(1+ i) x Sn = (1+ i)n+ (1+ i)n-1 + . . . + (1+ i)3 + (1+ i)2 + (1+ i).............. (ii)
Deducting (i) from (ii), we get
1+𝑖 𝑛 −1
i x Sn = (1+i)n – 1 i.e 𝑆𝑛 =
𝑖
1 𝑖
Or if the aim is to collect Re 1, the annual instalment should be =
𝑆𝑛 1+𝑖 𝑛 −1

Therefore if S is the total sinking fund required, I=Annual installation required will be:
𝑆𝑖
𝐼=
1+𝑖 𝑛 −1

Prof. A.V. Pendse, Department of Civil Engineering, VIIT, Pune-48 14

 Contd..Valuation
Methods of Depreciation
3. Sinking fund method –

Example – A person has purchased an old building at a cost of Rs. 90,000 on the basis that the cost of land
be Rs. 50,000 and cost of construction be Rs 40,000. considering the future life of the building structure be
20 years. Workout amount of annual sinking fund at 4% interest when the scrap value be 10% of the cost of
the building the structure

Cost of construction = Rs. 40,000

Scrap value = 0.1 x 40,000 = Rs. 4000

Therefore, total amount of sinking fund = 40000-4000 = Rs 36,000

Installment I = (36000 x 0.04)/((1+0.04)20-1) = Rs. 1208.96

Prof. A.V. Pendse, Department of Civil Engineering, VIIT, Pune-48 15

 Contd..Valuation
Methods of Depreciation
3. Sinking fund method –

Depreciation Calculation from Sinking Fund –

In this method, the depreciation is equal to annual sinking fund plus the interest of the accumulated
sinking fund till that year.
𝑖
Annual installment for 1 rupee sinking fund = , where n=life of building
1+𝑖 𝑛 −1

An amount of Re 1 in ‘m’ years = ((1+i)m-1)/i, where m is age of building

𝑖 1+𝑖 𝑚 −1
Therefore, Rate of depreciation at mth year =
1+𝑖 𝑛 −1 𝑖

Prof. A.V. Pendse, Department of Civil Engineering, VIIT, Pune-48 16

 Contd..Valuation
Methods of Depreciation
3. Sinking fund method –

Depreciation Calculation from Sinking Fund –

Example – The cost of construction of a new building according to present market rate is Rs 80,000 having a
life of 70 years. But if the building is 15 years old, determine the depreciated amount which should be
deducted from the cost of new building at 6% compound interest.
𝑖 0.06
Solution: 𝐼 = = = 0.00103
(1+𝑖)𝑛 −1 (1+0.06)70 −1

(1+𝑖)𝑚 −1 (1+0.06)15 −1
An amount of Rs. 1 after 15 years = = = 23.27
𝑖 0.06

Therefore, Rate of depreciation = 0.00103 X 23.27 = 0.02327

Depreciation in 15 years = 0.02327 X 80000 = 18,608

Prof. A.V. Pendse, Department of Civil Engineering, VIIT, Pune-48 17

 Contd..Valuation
Methods of Depreciation
4. Quantity Survey method – In this method, the property is studied in detail and extent of physical
deterioration is worked out to calculate the depreciation.

Prof. A.V. Pendse, Department of Civil Engineering, VIIT, Pune-48 18

 Contd..Valuation
Years Purchase – Year’s Purchase is defined as the capital sum required to be invested in order to receive a
net annual income as an annuity of Re 1 at certain rate of interest.

To get an annual income of Re 1 at a fixed rate of interest (i), the capital sum should be = 1 x 100/i

To gain an annual income of X, the capital sum = X*100/i

100/i is known as Year’s Purchase

Therefore, capital sum = Annual income (net) x Year’s Purchase

The multiplier of the net annual income to determine capital value is known as the Year’s Purchase (Y.P.)
and is useful to obtain capitalized value of a property

Annuity – It is the net installment of annual or periodical payment for the repayment of the capital amount
invested in a property for a specified period

Prof. A.V. Pendse, Department of Civil Engineering, VIIT, Pune-48 19

 To be discussed next time
Part –I
Valuation: Purpose of valuation. Meaning of price, cost, and value. Factors affecting Value.

Part-II
Types of value: Fair Market Value, Book Value, Salvage, Scrap Value, Distressed Value and Sentimental
Value. Concept of free hold and lease hold property.

Part-III
Estimation versus valuation. Methods of depreciation and obsolescence, Sinking Fund, Years Purchase.

Part-IV
Methods of Valuation of Building: Rental Basis, Land and Building basis, Direct Comparison Method, profit
based method, Belting of Land, Development method.

Part-V
Numerical on valuation.

Part-VI
Numerical on valuation

Prof. A.V. Pendse, Department of Civil Engineering, VIIT, Pune-48 20

 Thank You

Prof. A.V. Pendse, Department of Civil Engineering, VIIT, Pune-48 21