CEDC0212- Estimation, Costing and

Valuation
By:-
Dr. Arya Anuj Jee
(Ph.D.: IIT Guwahati)
Assistant Professor
CE-301, Department of Civil Engineering, NIT Jalandhar
Email: jeeaa@[Link]
Mob: +91 9476589956

• VALUATION
Valuation
❖ Valuation is the art of assessing the present fair value of a property at a stated time.
❖ Any material that has utility and demand, possesses some value.
❖ The term value refers to the exchange potential of one commodity to another
commodity
❖ The common medium used for estimating the value of any property or commodity is money
❖ The present value of a property may be decided by its selling price or income or by rent it
may fetch
❖ The value of a property depends on its structure, life, maintenance, location, bank
interest, legal control etc.
Necessity for Valuation
❖Investment or Occupation: - Valuation helps determine whether a property should be purchased for investment or
personal use, based on the income it generates compared to interest on invested capital, and the potential appreciation
in value.
❖Municipal Tax Fixation :- Property valuation is required to assess and fix municipal taxes.
❖Sale of Property: - Valuation helps determine the market price of a property. Sellers use this to set a reserve price,
below which they are unwilling to sell.
❖Rent Fixation:- Used to determine and justify fair rent as per the Rent Control Act.
❖Insurance Premium Calculation:- Valuation is needed to fix the insured value of a property, typically excluding
the land cost.
❖Loan and Mortgage:- Banks and financial institutions use property valuation to determine the mortgage value
and sanction loans against it.
Necessity for Valuation
❖Compulsory Acquisition: - Valuation is essential to decide fair compensation when property is acquired by the
government.
❖Speculation: - When property is purchased for future resale at a profit, valuation helps in estimating potential
gains.
❖Betterment Charges:- Valuation before and after development is used to determine betterment charges or
improvement fees.
❖Wealth Tax and Estate Duty:- The government uses valuation to assess the minimum taxable value of a
property or estate for wealth tax or estate duty.
❖Gift Tax:- The value of a gifted property must be determined to calculate the applicable gift tax payable by the
recipient.
❖ETC. …
Income
❖Gross Income – It is the total income and includes all recipes from various sources the outgoings and the operational
and collection charges are not deducted
❖Net income or net return – This is the saving or the amounts left after deducting all outgoings, operational and
collection expenses from the gross income or total receipt.
Net Income = Gross Income - Outgoing
❖Outgoings: - Outgoings or the expenses required to be incurred to maintain the revenue of the building. The
various types of outgoings are as follows:
❖Taxes: Municipal Tax, Property Tax, Wealth Tax, etc.,
❖Repairs: Carried out every year to maintain a property in fit condition
❖Management and Collection charges: Expenses on watchman, Liftman, Pump attendant, Sweeper, etc.
❖Loss of rent: The property may not be kept fully occupied in such a case a suitable amount should be deducted from
the gross rent and outgoings.
❖Insurance of the structure/building
❖Miscellaneous: These include electric charges for running the lift and pump, for lighting common places, and similar
charges that the owner is to bear.
OUTGOINGS
The following percentage of outgoings
1) Repair @ 10% of the gross income or rent

2) Municipal taxes @ 20% of the gross rent

3) Property tax @ 5% of gross rent

4) Management and collection charges @ 5% of gross rent

5) Insurance premium @ ½% of gross income

6) Miscellaneous charges @ 2% of the gross rent

Scrap Value and
Salvage Value
Scrap Value
• The residual value of a material or asset when it
becomes no longer usable for its original
purpose.
• Typically sold as scrap (e.g., old steel, broken Feature Scrap Value Salvage Value
machinery). Meaning Value of waste Value after useful
• Based on weight or material worth. material life
Salvage Value Condition Usually broken or Still
• The estimated value of an asset at the end of its unusable usable/resalable
useful life. Purpose Sold for material Sold for
• Can still be used in some capacity or resold. recovery reuse/resale
• Considered in depreciation calculations. Use in Accounting Rarely considered Used for
depreciation
calculation
Market Value of the property
❑Market Value
❖The current price at which an asset or company can be bought or sold in the market.

❖Determined by demand and supply forces.

❖Fluctuates frequently.

❖Important for investment decisions.

❑Factor affecting market value of the property

❖Forces of Demand and Supply
❖Rise in Population
❖Cost of construction and Material Cost
❖Rest Control Act and Rest Restriction Act
❖Improvement by Public Schemes
❖Interest on Schedule Banks or Government Securities
❖Abnormal Conditions
Book Value of the property
❑ Book Value
❖ The value of an asset as per the company's balance sheet.
❖ Calculated as Cost Price - Depreciation.
❖ Stable and based on accounting records.
❖ Used for financial reporting.
❑ Factors Affecting Book Value of a Property:
❖ Original Cost of Property: - The initial purchase price forms the base value.
❖ Depreciation:- Gradual reduction in value due to usage, age, and wear & tear.
❖ Maintenance and Repairs:- Good maintenance can slow down depreciation.
❖ Age of the Property:- Older properties generally have lower book values.
❖ Residual or Salvage Value:- Estimated remaining value after the useful life ends.
❖ Improvement or Renovation Costs:- Significant upgrades can increase the book value.
❖ Accounting Policies:- Methods like straight-line depreciation or declining balance method affect the rate at which book
value reduces.
❖ Legal or Regulatory Changes:- Changes in property laws, taxes, or valuation norms can impact book value.
❖ Damage or Accidents:- Natural disasters, fire, or accidents can cause sudden decrease in book value.
Difference Between Market Value and Book Value
Market Value Book Value
(a) The value is fixed by purchaser. (a) The value is fixed by the rate of depreciation.
(b) The value may be higher during the subsequent (b) The value cannot be higher during the
years due to increase of price index. subsequent year even due to increase of price
index.
(c) The value may be constant for a period. (c) The value cannot be constant, rather there is a
gradual fall.
(d) This is applicable to any type of property. (d) This is not applicable in case of land or metal
articles like Steel, Copper, Gold etc.
(e) Market value is considered for valuation. (e) Book value is considered for accounts book of a
company.
(f) This depends on forces of demand and supply, (f) Book value is not variable due to its demand
development of the area, etc. and supply or development of the area.
 Sinking Fund
❑It is a fund created by setting aside a fixed amount periodically from the property's income, intended to
accumulate sufficient money (along with interest) to rebuild, repair, or replace the property at the end of its
useful life.
❑Determination of Sinking Fund:
❖The amount of sinking fund depends on the life of the building and the rate of interest.
❖The annual sinking fund is calculated to accumulate an amount equal to the building’s value over its useful
life. It considers both periodic installments and interest earned during the period.
𝑖
𝐴𝑛𝑛𝑢𝑎𝑙 𝑆𝑖𝑛𝑘𝑖𝑛𝑔 𝐹𝑢𝑛𝑑 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝐼 = 𝑇𝑜𝑡𝑎𝑙𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑆𝑖𝑛𝑘𝑖𝑛𝑔 𝐹𝑢𝑛𝑑 (𝑆)
1+𝑖 𝑛−1
• Where
• i = Rate of interest (in decimal)
• n = Number of years (life of the building)
Example 1
❑An owner has installed an air cooler in a building at a cost of Rs. 8,000/- If the life of the air cooler is 18 years,
calculate the amount which he should set aside annually as sinking fund to accumulated the above cost at 5%
compound interest.
0.05
𝐴𝑛𝑛𝑢𝑎𝑙 𝑆𝑖𝑛𝑘𝑖𝑛𝑔 𝐹𝑢𝑛𝑑 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝐼 = 8000 = 284/-
1+0.05 18 −1

❑A person has purchased an old building at a cost Rs 90,000/- on the basis that the cost of land is Rs. 50,000/-
and the cost of building structure is Rs. 40,000/-. Considering the future life of the building structure be 20 years,
workout the amount sinking fund at 4% interest when scrap value is 10% of the cost of the building.

❑Ans: - 1209.6/-
Capitalised value
❑Capitalised Value refers to the present worth of a property based on its ability to generate income.
Specifically, it's the amount of money whose annual interest at a given rate equals the net income from the
property. This concept is pivotal in real estate and property valuation, especially when assessing income-
generating assets.

❑ Net Annual Income (NAI): The income remaining after deducting all expenses related to the property, such as
maintenance, taxes, and management fees.
❑ Capitalisation Rate (r): The expected rate of return on investment, often based on prevailing market interest
rates or investor expectations.
Year’s Purchase
❑Year’s Purchase Method
❖An alternative approach involves the Year’s Purchase (YP), which is the reciprocal of the
capitalization rate:
Example 2
❑Work out the value of year’s of purchase for an old building if its future life is 15 years and the rate of interest
is 7% on capital and 4% for sinking fund
1
Years' of purchase 𝑌. 𝑃. = ,
𝐼𝑝 +𝐼𝑐

Ip = 0.07
𝑖 0.04
But coefficient of sinking fund 𝐼𝑐 = = = 0.05
1+𝑖 𝑛 −1 1+0.04 15 −1

1
Years' of purchase 𝑌. 𝑃. = = 8.333
0.07+0.05
Example 3
❑A lease-hold property is to produce a net income of 12,000/- per annum for the
next 60 years. Whct is the value of the property? Assume that the landlord desire
a rate of 6% on his capital and the sinking fund to replace the capital is also to
accumulate 6%.
❑What will be the value of the property id the rate of interest for redemption of
capital is 3%.

❑Answer: 193860, and 181548

Capitalised value
❑Factors Influencing Capitalised Value
❖Net Income Stability: Consistent and reliable income streams enhance capitalized value.
❖Interest Rates: Lower market interest rates can increase capitalized values, as investors accept lower returns.
❖Property Condition: Well-maintained properties may command higher rents, boosting net income.
❖Location: Properties in prime locations often generate higher income, influencing their capitalized value.
❖Market Demand: High demand for similar properties can reduce the capitalization rate, increasing capitalized
value.
Depreciation
❖ Depreciation is the reduction in the value of an asset over time due to wear and tear, ageing, obsolescence, or usage.
❖ It reflects the decrease in utility and market value of the property or equipment.
❖ In general, an annual decrease in the value of property is known as annual depreciation
❖ Usually, the percentage rate of depreciation is less at the beginning & gradually increases during later years
❑Causes of Depreciation:
❖ Wear and Tear (due to usage)
❖ Obsolescence (outdated technology or design)
❖ Age (natural decay over time)
❖ Accidents (damage)
❖ Neglect or Poor Maintenance
Depreciation method of valuation
❖ According to this method of valuation the building should be divided in to 4 parts
✓ Walls
✓ Roofs
✓ Floors
✓ Doors and Windows

❖ The cost of each part should first be worked out on the present-day rates by detailed
measurements

❖ The cost of each of the four parts should be calculated with the help of depreciated value of
each part and it can be found by the following formula
Method of depreciation calculation
❑Method of depreciation calculation
❑Straight line method: - assumed that the property loses it value by the same amount every year
❑Constant percentage (or) Declining balance method:- assumed that the property will loose its value by a constant
percentage of its value at the beginning of each year
❑Sinking fund method:- assumed to be equal to the annual sinking fund plus the interest on the fund for every year
❑Quantity survey method:- property is studied in detail and loss in value due to life, wear & tear, decay, obsolescence etc.
worked out
Straight line method
Methods for calculating Depreciation
i) Straight line method:
❖ In this method, it is assumed that the property loses it value by the
same amount every year
❖ A fixed amount of the original cost is deducted every year, so that at the
end of the utility period only scrap value left

𝑶𝒓𝒊𝒈𝒊𝒏𝒂𝒍 𝒄𝒐𝒔𝒕 −𝑺𝒄𝒓𝒂𝒑 𝑽𝒂𝒍𝒖𝒆 𝑪−𝑺

Annual Depreciation (D) = =
𝑳𝒊𝒇𝒆 𝒊𝒏 𝒚𝒆𝒂𝒓 𝒏
ii) Constant percentage (or) Declining balance method:

❖ It is assumed that the property will loose its value by a constant percentage of its value at
the beginning of each year
𝟏
𝑺 𝒏
Annual depreciation percentage (P) = 1 -
𝑪

The depreciated cost of the property at the end of the first year C1 = C – PC
C1 = C (1 - P)

The depreciated cost of the property at the end of the Second year
C2 = C1 – PC1 = C1 (1 - P) = C (1 - P)2
The depreciated cost of the property at the end of the nth year or Salvage value = C (1 - P)n
iii) Sinking fund method:
❖ The depreciation of property is assumed to be equal to the annual sinking fund plus the
interest on the fund for every year, which is supposed to be invested on interest-bearing
investment
❖ If “A” is annual sinking fund & C – Original or initial cost
❖ x, y, z – represents interest on the sinking fund for subsequent years
𝒊
Annual installment of sinking fund (P) = Ic × S.F = × S.F
𝟏+𝒊 𝒏−𝟏
Age in Annual Interest on Depreciation Total Depreciation Book Value
years Sinking sinking fund
fund
1 A A A C–A
2 A x A+x 2A + x C – (2A + x)
3 A y A+y 3A + x + y C – (3A + x + y)
4 A z A+z 4A + x + y+z C – (4A + x + y+z)
iv) Quantity survey method:
❖ It is most widely used method in practice. The property is studied in detail and loss in
value due to life, wear & tear, decay, obsolescence etc. worked out
❖ Each and every step is based on some logical system without any fixed percentage of the
cost of property
❖ Only experienced values can work
Example: A car purchased for 500000 Rs in 2008, the
salvage value is 200000 Rs in 2014. calculate the depreciation
in each year by all methods
C = 500000 S = 200000 n=6
i) Straight line method:
𝑪−𝑺 𝟓𝟎𝟎𝟎𝟎𝟎−𝟐𝟎𝟎𝟎𝟎𝟎
Annual Depreciation (D) = = = 50000
𝒏 𝟔

Year Depreciation Total depreciation Book value

2008 - - 500000
2009 50000 50000 450000
2010 50000 100000 400000
2011 50000 150000 350000
2012 50000 200000 300000
2013 50000 250000 250000
2014 50000 300000 200000
ii) Constant percentage (or) Declining balance method:

𝟏 𝟏
𝑺 𝒏 𝟐𝟎𝟎𝟎𝟎𝟎 𝟔
Annual Depreciation percentage (P) = 1 - =1 - =0.142
𝑪 𝟓𝟎𝟎𝟎𝟎𝟎
The Book value of the property in year 2008 = 500000
in year 2009 = C (1 - P)1 = 500000 (1-0.142) = 429000
Year Book Value depreciation Total depreciation
2008 500000 - -
2009 429000 71000 71000
2010 368082 60918 131918
2011 315814.36 52267.64 184185.64
2012 270968.72 44845.64 229031.28
2013 232491.16 38477.56 267508.84
2014 199477.41 33013.75 300522.59
 iii) Sinking fund method:
Sinking fund required = 500000 – 200000 = 300000
Rate of interest in S.F = 5 % = 0.05, n = 6
𝒊 𝟎.𝟎𝟓
Annual installment of sinking fund (P) = Ic × S.F = × S.F = 𝟏+𝟎.𝟎𝟓 𝟔−𝟏
×300000 = 44105.24 Rs
𝟏+𝒊 𝒏−𝟏

Age in Annual Interest on Depreciation Total Depreciation Book Value

years Sinking sinking fund
fund
2008 - - - - 500000
2009 44105.24 - 44105.24 44105.24 455894.76
2010 44105.24 2205.26 46310.5 90415.74 409584.26
2011 44105.24 4520.79 48626.03 139041.77 360958.23
2012 44105.24 6952.09 51057.33 190099.1 309900.9
2013 44105.24 9504.95 53610.19 243709.29 256290.71
2014 44105.24 12185.46 56290.71 300000 200000
Methods of Valuation
❖Rental method of valuation

❖Direct comparison with the capital value

❖Valuation based on profit

❖Valuation based on cost

❖Development method of valuation

❖Depreciation method of valuation

Rental method of valuation
❖ In this method, the net income by way of rent is calculated by deducting all outgoings from the
gross rent

❖ A suitable rate of interest as prevailing in the market is assumed and years of purchase is
calculated

❖ This net income multiplied by years of purchase gives the capitalized value or valuation of the
property

❖ This method is applicable only when the rent is known or probable rent is determined by
enquires
Rent Fixation
❖ The rent of building is fixed on the basis of certain percentage of annual interest on the capital
cost and all possible annual expenditure as outgoings
❖ Allowing certain prevailing percentage of interest on capital net returns may be worked (Capital
cost divided by the year’s purchase will gives the net returns)
❖ When the capital cost not known, this may be calculated by the method of valuation
❖ The owner expects about 2% higher interest than the prevailing interest
Gross rent = Net returns + out goings
❖ The gross rent per month can be calculated by dividing the this amount by 12. the rent worked
out by this procedures is known as standard rent
❖ While the actual rent of property may be higher or lower than this rent depending on the
situation of property, type of construction, demand etc.
Example: Cost of construction of a building is 8,00,000 Rs, on pre-
hold land measuring 100 m2. the Prevailing rate of the land of
neighborhood is 1500 Rs /m2, determine the net rent of the property
i) The expenditure on outgoings, including sinking fund is 30,000 per year
ii) The owner expects 6% return on the cost of construction and 5% of cost of
land

Cost of construction of building = Rs 800000

Cost of Land = 100 × 1500 = Rs 150000
6
Net return on building cost = × 800000 = 48000
100
5
Net return on building cost = × 150000 = 7500
100
Total net return = Rs 55,500
Total out goings = Rs 30,000
Gross rent = Net return + outgoings
85500
= 55,500 + 30,000 = 85500 Rent per month = =7125 Rs/-
12