Estimating and Valuation

CVL 431: (3-2-0)

Chapter 5: Valuation (5 hrs)

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BCE_BCRE, By: Er. Rajendra Aryal
Outlines:

5.1 Introduction of Valuation

5.2 Purpose of Valuation

5.3 Terms Used in Valuation

5.4 Methods of Determining Value of Property

5.5 Methods of Valuation Report Writing

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5.1 Definition and terminologies:
5.1.1 Valuation is the technique of estimating or determining
the fair price or value of a property such as building and
other engineering structures, land etc. at present which is
acceptable to concerned parties and agencies such as buyer
and seller, bank, insurance company, court etc..
• The present value of the property is decided by:
 Selling price of the property
 Income the property can bring in
 Rent the property may fetch
 Cost and Value:
 Cost: Original cost of construction of purchase. Example;
construction cost of RCC building is NPR 30 lakhs.
 Value: The present saleable price of the property. Value may
be higher or lower than the original cost. Example: value of
the property on sale is NPR 35 lakhs ( NPR 5 lakhs higher)
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5.2 Purpose of valuation:
Valuation is mainly carried out for the following purposes.
 Security of loans or mortgage
 Buying and selling property
 Application of tax on property eg. integrated property tax
from municipality
 Fixation of rent of the property ( usually 6% to 10% of
valuation amount)
 Providing compensation on compulsory acquisition
 Betterment of insurance charges

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5.1.2 Terminologies used in valuation:
i. Annuity:
 It is the annual periodic payments for repayment of the capital
amount invested by a party.
 It is paid at the beginning or at the end of the year for specified
number of years
 Types of annuity:
a) Annuity certain:
 It is the annuity paid for definite numbers of years
 Annuity amount will be higher for lesser number of years and
vice versa.
b) Annuity due: It is the annuity paid at the beginning of each
period of the year and payments continued for definite
number of periods
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5.1.2 Terminologies used in valuation:
i. Annuity:
c) Deferred annuity: It is the annuity of which payment begins at
future date after a number of years of sanction of loans
d) Perpetual annuity: It is the annuity of which payments are
continued for indefinite periods.
Annuity may be paid 12-monthly, quarterly, half yearly
installments.
ii. Book value:
 It is the amount shown in official account book for the
property after allowing necessary depreciation.
Book value (for nth year) = Original cost–Depreciation amount up
to (n-1) year
 It depends on amount of depreciation
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5.1.2 Terminologies used in valuation:
ii. Book value…
 Amount is reduced year to year and at the end of the utility
period of the property; book value will be the scrap value
iii. Scrap value:
 It is the value fetched by dismantled materials of the property
 The value is attained at the end of the utility period of the
property such as building of dismantled materials like stone,
steel, bricks, timber etc. will get certain amount.
 The cost of dismantling and removal of rubbish will be
deducted from the cost of dismantled materials to achieve
scrap value.
 It is usually 10% of the total construction cost.
 For machine; it is cost of metal or dismantled parts.
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5.1.2 Terminologies used in valuation:
iv. Salvage value:
 It is the value of the property at the end of the utility period
without being dismantled.
 It is the sale value after a property completes normal span of
life.
 It does not include the cost of removal, sale etc..
 Note: Scrap and salvage value normally give some positive
figure. But sometimes it may be zero or negative; example: in
case of RCC building structure, it is most obvious to get the
negative figure because dismantling and removal cost is very
high.

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5.1.2 Terminologies used in valuation:
v. Market value:
 It is the value of the property which can be achieved at any
particular time from the open market when property is put on
sale.
 The value changes time to time as per supply and demand
condition of the market.
 Value also changes due to change in fashion, means of
transport, labour and material cost.
vi. Rateable value:
It is the net annual letting value of the property.
R.V.= Gross rent- Amount of annual repairs
 Municipal and other taxes include in certain percentage.
 Valuation Office Agency (VOA) in UK determines this value.
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5.1.2 Terminologies used in valuation:
vii. Gross income:
 It is the total income and includes all receipts from different
sources with out deduction of the outgoings, operational and
collection charges.
viii. Net income/return/profit/rent:
 It is the saving after deducting all outgoings, operational and
collection charges from gross income.
ix. Outgoings:
 It is the expenses which includes taxes, repairs, management
and collection cost, sinking fund, loss of requisites, electric
charges etc..
 It is necessary to know the outgoing to estimate the revenew
from the property.
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5.1.2 Terminologies used in valuation:
x. Municipal taxes:
 They are the taxes imposed on the fixed properties (land and
building) by municipality to run its public utility services, repair
and maintenance.
xi. Obsolescence:
 It is the condition of the property becoming out of date in
style, structure and design etc..
 It is the condition of the property becoming out of date in
style, structure and design etc..
 It reduces the value of the property despite of its good physical
condition to function.
 Obsolescence may be due to the reasons such as progress in
arts, changes in fashions, changes planning ideas, new
innovations, improvement in design, techniques etc..
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5.1.2 Terminologies used in valuation:
xii. Capitalised value: It is equal to: Net annual income x
Year’s purchase. It is the amount of money of which annual
interest at the highest prevailing rate of interest will be equal
to net income from the property.
• Eg. Exercise 1: Calculate the capitalised value of the property
whose net annual rent is Rs. 60,000 and the highest prevailing
rate of interest is 4%.
• For Rs. 4 interest capital Rs. 100
• For Rs. 1 interest capital is Rs. 100/4
• For Rs. 60,000 interest capital is Rs (100/4) x 60,000 = Rs.
15,00,000 which is capitalised value.
• For the same net income and if the rate of interest is 6% then,

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5.1.2 Terminologies used in valuation:
The capitalised value = (100/6) x 60,000 = Rs. 10,00,000
Thus, higher the rate of interest, lower the capitalised value of
the building property. To maintain the same capitalised value,
rent should be increased.
xiii. Year’s purchase: It is the capital sum required to be invested
to receive the annuity of Rs. 1 at certain rate of interest.
eg. For interest rate of 5% per annum,
To get Rs. 5 it is required to deposit Rs. 100 in the bank
To get Rs. 1 it is required to deposit Rs. 100/5 = Rs. 20 in the
bank
Y.P. = 100/Rate of interest = 1/i where i = Rate of interest in
decimal.

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5.1.2 Terminologies used in valuation:
Y.P. is provided for the property whose period of utility is limited,
in such a way that it covers interest on capital and provision for
sinking fund to accumulate to replace the capital. Mathematically,
Y.P. = 1/ (i+sc)
Where, sc = sinking fund coefficient to replace Rs. 1 at the end of
the given period (sinking fund coefficient)
xiv. Sinking fund: It is the fund gradually accumulated in a
periodical way or annual deposit for the replacement of the
building or structure at the end of its useful life. It is created
by regular periodic deposit in higher compound interest to
bear investment. It is created by taking sinking fund policy
with insurance company or depositing in bank with highest
compound

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5.1.2 Terminologies used in valuation:
interest.
• Sinking fund is determined by cost of purchase (present value)
of building and scrap value of building in which cost of land is
not taken. Sinking fund is also required for the payment of
loan. The annual instalment of sinking fund may be found out
by formula.
Annual instalment of sinking fund (I) = Sn i / [(1+i)n-1]
Where, Sn = Total amount of sinking fund to be accumulated in
n years, n= number of years to accumulate the sinking fund, i=
rate of interest in decimal

Sn = I [(1+i)n-1] / i
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5.1.2 Terminologies used in valuation:
 Tutorial 1: An old building is purchased by an owner at a cost
of Rs. 45,00,000 excluding the cost of land calculate the
amount of annual sinking fund at 4% interest rate. Assuming
the future remained life of building be 25 years and scrap
value of the property be 10% of the cost of purchase.
 Solution: Total amount of sinking fund to be accumulated in
25 years
• Sn = Rs. 45,00,000 x 90/100 = = Rs. 40,50,000 (Considering
10% scrap value)
• Given, interest rate i = 4% = 0.04, n=25 years
• Annual instalment of sinking fund (I) = Sn i / [(1+i)n-1]
• = Rs. 40,50,000 x 0.04/ [(1+0.04)25-1] = Rs. 97248.45

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5.1.2 Terminologies used in valuation:
xv. Depreciation: It is defined as the decrease or loss in the
value of the property due to:
 Structural deterioration
 Use
 Life
 Wear and tear
 Decay
 Obsolescence
• It is exhaustion of the usefulness or utility of the property.
Annual depreciation is common annual decline in value of the
property. Percentage rate of depreciation is less in the
beginning years of

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5.1.2 Terminologies used in valuation:
• utilisation of property and gradually increases in the
forthcoming years. The present value of the property is
calculated after the deduction of total amount of depreciation
from the original cost calculated.
 Method of calculating depreciation:
a) Straight line method: It is assumed that value is reduced
in the same amount every year.
• D = (C-S)/n
• Where, C = Original cost
• S = Scrap value
• n = Life of property
• D = Annual depreciation

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5.1.2 Terminologies used in valuation:
• Book value in N years = C-NxD
 Tutorial Example:
• The present value of a machine is Rs. 3,60,000. Work out
the depreciated value at the end of 8 years if the salvage
value is 30,000. Assume the life of machine is 20
years.Use straight line method for finding depreciation.
 Solution:
• C = Rs. 3,60,000
• S = Rs. 30,000
• n = 20 years
• Using straight line method,
• Annual depreciation,

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5.1.2 Terminologies used in valuation:
• = (C – S) / n
• = (3,60,000 – 30,000) / 20
• = Rs. 16,500
• Total depreciation after 8 year
• = 8 × Rs. 16,500
• = Rs. 1,32,000
• Depreciated value after 8 years
• = Rs. (3,60,000 – 1,32,000)
• = Rs. 2,28,000
b) Constant percentage method or declining balance
method: It is assumed that value is reduced in the same
amount every year.
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5.1.2 Terminologies used in valuation:
• Rate of depreciation (D) = 1- (S/C)(1/n)
• Value at,
• First year (C1) = C – DC
• Second year (C2) = C1 – DC1
• The value of the property at the end of the m years
= C × (1-D)m
• The formula will not work when S=0, when the ratio S/C
is very small, the depreciation for the first year will be
considerable.
 Tutorial Example:
 The present value of a machine is Rs. 3,60,000. Work out the
depreciated value at the end of 8 years if the salvage value is
30,000. Assume the life of machine is 20 years. Use constant
percentage or declining balance method and apply check of
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5.1.2 Terminologies used in valuation:
• Cost of machine (C) = Rs. 3,60,000
• Salvage value (S) = Rs. 30,000
• Useful life (n) = 20 years
• Find depreciated value at end of 8 years (m = 8)
Using Declining Balance Method with proper formula and check
of calculations
• Rate of depreciation (D) = 1- (S/C)(1/n)
=1−(30,000/3,60,000) (1/20) = 0.1168 or 11.68%
• Value of machine after 8 years
= C × (1-D)8 = Rs. 3,60,000 x (1-0.1168)8
= Rs. 3,60,000 x (0.8832)8
= Rs. 1,33,283
Check: Value after 20 years
= C × (1-D)20 = Rs. 3,60,000 x (1-0.1168)20
= Rs. 30,025 Rs. 30,000
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5.1.2 Terminologies used in valuation:
c) Sinking fund method:
Depreciation for the particular year = Annual sinking fund +
Interest on the fund for that year
Suppose A = Annual sinking fund
b, c, d = Interests on sinking fund for the successive
number of years
• C = Original cost, then;

At the end Depreciation Total Book value

of for the year depreciation
First year A A C-A
Second year A+b 2A+b C-(2A+b)
Third year A+c 3A+b+c C-(3A+b+c)
Fourth year A+d 4A+b+c+d C-(4A+b+c+d)

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5.1.2 Terminologies used in valuation:
 Tutorial Example of Sinking Fund method:
• Find out present value of building, which was constructed 16
years ago at a cost of Rs. 6,00,000. Assuming life of building
is 50 years, rate of interest 8% and scrap value 10%.
 Solution:
C = Rs.6,00,000
S = 0.10 × 600000 = Rs. 60,000
Total amount of sinking fund required
( C – S ) = 6,00,000 – 60,000 = Rs. 5,40,000
Building constructed 16 years ago, so we need value after
m = 16 years
Annual instalment of sinking fund (I) = Sn i / [(1+i)n-1]
= Rs. 5,40,000 x 0.08 / [(1+0.08)50-1] = Rs. 941.14
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5.1.2 Terminologies used in valuation:
 Solution…
Total amount of sinking fund with compound interest of 8% to
be accumulated in m years (Sm) = I [(1+i)m–1]/(i)
= 941.14 [(1+0.08)16–1]/(0.08)
= 941.14x30.32= Rs. 28,535.36; which is the accumulated
depreciation after m = 16 years
Present value after 16 years = Original cost –Depreciation upto
16 years
= Rs. (6,00,000-28,535.36)
= Rs. 5,71,464.64
(In words: Five lakhs seventy one thousand four hundred
sixty four rupees and sixty four paisa only)

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5.1.2 Terminologies used in valuation:
d) Quantity survey method: In quantity survey method the
property is studied in details and loss in value due to life, wear
and tear, decay, obsolescence, etc., worked out. Each and
every step is based on some logical ground without any fixed
percentage of the cost of the property. An only experienced
valuer can work out the amount of depreciation and the
present value of the property by this method.

xvi. Distress value: It is the value of a property fixed at lower

price than that of an open market rate due to financial
difficulty of vendor or panic due to war and riot or otherwise.

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5.1.2 Terminologies used in valuation:
xvi.Freehold property: It is the property (land, building) in
which owner has full right of possession of the property.
Owner can use the property as he/she like subjected to
governmental rules and regulations (federal and local
government). Owner may use the property himself, give leases
or tenancies for a short or long period.
xviii.Leasehold property: It is the property which is physical
possessed by person/party from original owner (lessor) as per
lease paper. The person/party who takes the lease is lease or
lease holder and the owner who grants lease is known as
lessor.

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5.3 Factors affecting valuation:
The value of the property depends on:
i. Structural type and life of the property or building
condition and design such as
• Age of the building and how well it has been maintained
• Materials used in construction (e.g., bricks, concrete, steel)
• How well the rooms are planned and how the building
looks
• Quality of flooring, painting, doors, windows, etc.
• Periodical maintenance cost
ii. Location, utility of the property (urban, rural,
commercial, residential etc.):
• How close the property is to schools, hospitals, markets,
and transport facilities
• The popularity and safety of the area
• Whether roads and other connections are good
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5.3 Factors affecting valuation:
iii. Land features
• Size and shape of the land
• Type of soil and slope of the land
• Whether the land is allowed to be used for residential,
commercial, or other purposes (zoning)
iv. Legal status and control:
• Whether the property has a clear ownership and no legal
problems
• If the building follows local building rules and has
necessary approvals
v. Market position
• The current demand and supply of property in the area
• Bank interest rates on loans and overall inflation

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5.3 Factors affecting valuation:
o Economic growth and upcoming development projects
nearby
vi. Purpose for which the valuation is done:
• The value of a property changes depending on the
purpose of valuation, such as for sale, rent, loan, tax,
insurance, or compensation.
• Market value is used when buying or selling and reflects
what buyers are willing to pay under current conditions.
• Loan or mortgage valuations are usually more cautious,
focusing on the amount a bank can safely lend against the
property.
• Insurance valuations only consider the cost to rebuild the
structure, not the land or market demand.
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5.3 Factors affecting valuation:
• For taxation or compensation, government-set rules or
special conditions (like loss or future potential) can lead to
a value that's different from the open market price.
vii. Facilities and infrastructure:
• Availability of water, electricity, drainage, and internet
• Distance from important places like schools, shops, and
health centres
• Quality of surrounding infrastructure like roads and
streetlights
viii. Environmental Conditions:
• Whether the area is at risk of floods, earthquakes, or
landslides
• Pollution levels and presence of greenery or open spaces

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5.3 Factors affecting valuation:
ix. Social and economic environment:
• Safety and crime rate in the locality
• Income level and lifestyle of people living nearby
• Chances of renting out the property or selling it at a higher
price later
x. Government policies and taxes:
• Property tax and other charges
• Any benefits or discounts provided by the government
• New rules or changes that can affect property value

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5.4 Methods of determining the value of property
(depreciation, capitalised value, development methods):
a) Depreciation method of valuation:
 In this method, building is divided into four segments. These
are:
 Walls
 Floors
 Roof
 Doors and windows
 Cost of each item is found out by detailed measurement.
 Life of each segment is determined with the help of prescribed
table containing items of work and their corresponding life.
 Then, depreciated value of each segment is calculated by
D = P [(100-rd)/100]n
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5.4 Methods of determining the value of property
(depreciation, capitalised value, development methods):
Where,
D = Depreciated value of segment
P = Cost at present market rate of each segment
rd = The fixed percentage rate of depreciation in number

Structural life Rate of depreciation

(years) (rd)
100 1.0
75 1.3
50 2.0
25 4.0
20 5.0
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5.4 Methods of determining the value of property
(depreciation, capitalised value, development methods):
 The value calculated like this excludes the present
 Cost of land
 Cost for water supply and sanitary fittings
 Cost for electric fittings etc.
 If the building is not properly maintained, suitable deduction
for neglected repairs is taken into consideration.
 Cost of land is taken with reference of the
 Recent sale transaction in the locality
 Enquiry from the property broker
 Value set by governmental land registration office for the
fiscal year
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5.4 Methods of determining the value of property
(depreciation, capitalised value, development methods):
 Land value can be calculated by mixing weightage value with
reference of the fair market value (FMV) for which weightage
is usually taken 70% while for governmental value (GOV)
weightage is usually taken as 30%.
a) Capitalised value (CV) method of valuation:
 Rental method of valuation: In this method, net income by
way of rent is found by deducting all the outgoings from gross-
rent. Year’s purchase is calculated with suitable prevailing
market rate. Capitalised value (CV) is calculated by:
Capitalised value (CV) = Net rent x Year’s purchase, which
is the valuation of the property. The condition for this type of
valuation is known rent or probable rent by enquiries.
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5.4 Methods of determining the value of property
(depreciation, capitalised value, development methods):
 Profit based method of valuation: This method is suitable for
commercial buildings like hotels, cinemas, theatres, trade mall
etc. for which the capitalised value is based on net profit from
the property. Capitalised value (CV) is calculated by:
Capitalised value (CV) = Net profit x Year’s purchase
a) Development method of valuation:
• This method is adopted for a properties which are in the
underdeveloped stage or partly developed and partly
undeveloped stage such as land development, plotting a colony
etc. For large plots divided into desirable real estates (plots)
after providing roads, footpaths, parks, gardens etc.

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5.4 Methods of determining the value of property
(depreciation, capitalised value, development methods):
 This valuation method is to be adopted for setting the selling
price for divided plots. Area required for roads, parks etc
(about 25-30%) are assumed. Other expenditures for
development should be known.
Total revenue=Total costs (Land acquisition cost to
owner+Development charge+Fees of Architects and
Engineers)+Net profit
 This method can also be adopted for renovation (additions,
alterations and improvements) of building. Anticipated future
net income after renovation is worked out. The net income is
multiplied by Y.P. to get the anticipated capitalised value. Total
expenditure required for renovation is worked out. Original
cost plus new expenditure is compared with
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5.4 Methods of determining the value of property
(depreciation, capitalised value, development methods):
anticipated capitalised value to justify the investment in
renovation.
a) Valuation by direct comparison with capital value: It is the
method which consists of calculation of the value of the
proposed property by comparing with the sale price of the
similar properties in the locality. This is adopted when rental
value is not available.
b) Value based on cost: It is the method in which actual cost of
constructing a building (new construction at present) in
possessing the property is taken as a reference or basis to carry
out the value of the building. Necessary depreciation and points
of obsolescence are taken into consideration.
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5.4 Methods of determining the value of property
(depreciation, capitalised value, development methods):
• 5.4.1 Valuation of Building: It depends upon the:
i. Type of structure
ii. Durability
iii. Location (Commercial, residential, industrial, religious etc.)
iv. Size, shape and frontage
v. Width of roadways
vi. Quality of materials used in construction with present days’
price of materials
vii. Life line facilities on the building (water supply, sanitary,
electric and communication internet etc.)
viii. Building structure on free hold (high value) or leasehold
(low value) land
ix. Market condition for purchase (supply and demand)
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5.4 Methods of determining the value of property
(depreciation, capitalised value, development methods):
 Valuation of building is determined by finding out the present
construction cost with the help of present day fair rate. Search
out the life span and age of the building is one of the major
work in carrying out the valuation. Present day cost is found
out by one of the methods briefly explained below.
i. Cost from records: The record of detailed estimate and bill of
quantities of building can be used to determine the present day
construction cost with the help of present day rate available
from district rates.
ii. Cost by detailed measurement: It includes preparation of as
built drawings and quantities (BoQ) if previous record is not
available. The detail measurement is taken of the building and
calculation is made for various items of work.
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5.4 Methods of determining the value of property
(depreciation, capitalised value, development methods):
• The present cost of each item of work is found out with the
help of prevalent rate of work in the locality (district rates).
Specification of work should be complied with as per actual.
iii. Cost by plinth area basis: This is the simple method to find
the cost of building by plinth area basis. Plinth area is
measured and added for every floor of building and prevailing
plinth area rate for the type of building is taken from the
market or concerned authority (municipality, bank etc.) to
calculate the value of building. Thorough examination of
different parts of building from foundation to roof is
necessary to set the plinth area rate. This basis provides the
fair cost in short time for practical purpose. Eg. Rs. 3,200 per
square feet for RCC building.
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5.4 Methods of determining the value of property
(depreciation, capitalised value, development methods):
iv. Cost by cubical content method: This is a technique used to
estimate the value of a building based on its volume. It is
usually applied to multi-storey buildings where the height
considerably affects the cost. The volume of the building is
calculated by multiplying the length, breadth, and height
(from the ground level to the roof). The total cubical content
is then multiplied by a standard rate per cubic feet or meter,
derived from similar buildings in the area or related authority.
This is more accurate valuation method than area-based
methods, mainly for buildings with changing storey heights or
complex structures.

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5.4 Methods of determining the value of property
(depreciation, capitalised value, development methods):
• Note: Determination of depreciation of building considering
the rate of depreciation is low for beginning years of utility
which increases gradually in later years in higher range has been
tabulated below. Total life of building = 80 years.
Span interval of Years Depreciation per Total
life year depreciation
0 to 5 years 5 - Nil
5 to 10 years 5 @ 0.50% 2.50%
10 to 20 years 10 @ 0.75% 7.50%
20 to 40 years 20 @ 1.00% 20.00%
40 to 80 years 40 @ 1.50% 60.00%
Total 90.00%
Scrap value 10.00%
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5.4 Methods of determining the value of property
(depreciation, capitalised value, development methods):
• Tutorial examples on valuation:
Tutorial 1 (Depreciation method): A horizontally and vertically
symmetric 4 storey RCC framed first class building was constructed 3.5
decades back (ago) having life span of 70 years in design. The land plot
area is 0-13-3-1 Ropani-Aana-Paisa-Daam) in local unit. The plinth area of
building at ground floor is 20 m x 15 m. The cost of land derived from
current market is Rs. 6,500 per square metre and the same by government
land registration office is Rs. 4,500 per square metre. The plinth area rate of
building in the valuation procedure book of bank is Rs. 32,500 per square
metre. Work out the valuation of the property for the security of loan for the
bank. If bank offers maximum loan in distress value of 65% by its policy,
then, calculate the highest value of loan the property owner may be eligible
to receive from the bank. Take weightage rate as 70% from fair market
value (FMV) and 30% from government value (GOV) for valuation of
land. (Conversion unit for land: 1 Ropani = 16 Aana = 508.8 sqm, 1 Aana =
4 Paisa, 1 Paisa = 4 Daam)
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5.4 Methods of determining the value of property
(depreciation, capitalised value, development methods):
Tutorial 1 (Depreciation method):
Solution: Given,
• Plinth area of building at ground floor = 20 m x 15 m = 300
sqm
• Number of regular storey = 4
• Plinth area of all floors = 4 x 300 = 1200 sqm
• Plinth area rate for building construction = Rs. 32,500 per sqm
• Present cost of building construction (P) = Rs. 32,500 x 1200
= Rs. 3,90,00,000.00
• Age of the building (n) = 3.5 decades = 35 years
• Life span of the building = 70 years
• Rate of depreciation = 100/70 = 1.43 (Assumption: If life span
= 100, then rd = 1.00)
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5.4 Methods of determining the value of property
(depreciation, capitalised value, development methods):
Tutorial 1 (Depreciation method):
Solution…Now,
• Depreciated value of building = P [(100-rd)/100]n
• = Rs. 3,90,00,000 x [(100-1.43)/100]35
• = Rs. 2,35,57,602.34
• We also have,
• Area of land = 0-13-3-1 (R-A-P-D)
• 1 Aana = 508.8/16 = 31.8 sqm
• 1 Paisa = 31.8/4 = 7.95 sqm
• 1 Dam = 7.95/4 = 1.99 sqm
• Therefore, Area of land = 13x31.8 + 3x7.95 + 1x1.99
• = 439.24 sqm
• Rate of purchase of land by (GOV) = Rs. 4,500 per sqm
• Rate of purchase of land by (FMV) = Rs. 6,500 per sqm
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5.4 Methods of determining the value of property
(depreciation, capitalised value, development methods):
• Weightage rate for land = 30% for GOV, 70% for FMV
• Now for land valuation purpose,
• Rate of purchase combining both weightage rate
• = [30% of Rs. 4,500 + 70% of Rs. 6,500] per sqm
• = Rs. 5,900 per sqm
• Value of land = Rs. 5,900 x 439.24 = Rs. 25,91,516.00
• At the end,
• Total valuation of property = Depreciated value of building +
Value of land
• = Rs. 2,35,57,602.34 + Rs. 25,91,516.00
• = Rs. 2,61,49,118.34
• (In words: Two crore sixty one lakhs forty nine thousand
one hundred eighteen rupees and thirty four paisa only)
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5.4 Methods of determining the value of property
(depreciation, capitalised value, development methods):
• If bank offers maximum loan in distress value of 65% by its
policy, then, the highest value of loan the property owner may
be eligible to receive from the bank.
• = 65% x Rs. 2,61,49,118.34
• = Rs. 1,69, 96,926.86
• (In words: One crore sixty nine lakhs ninety six thousand
nine hundred twenty six rupees and eighty six paisa only)

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5.4 Methods of determining the value of property
(depreciation, capitalised value, development methods):
 Tutorial 2 (Capitalised value method): Workout the valuation of
the cinema hall with the following data.
i. Cost of land = Rs. 55,00,000.00
ii. Gross income = Rs. 1,20,00,000
iii. Expenses undergone per year:
a) To run cinema including staff salary, electricity charges,
municipal taxes, license fee, stationary and printing etc. is 30% of
gross income.
b) Repair and maintenance of plants, machinery and tools at 5% of
their capital cost which is Rs. 1,00,00,000.00
c) Sinking fund for machinery whose life is estimated as 30 years at
5% after allowing 10% scrap value.
d) Insurance premium is Rs. 1,55,000.00 per year.
• Assume years purchase for 60 years at 8% and redemption of the
capital at 4%. Annual repair of hall is 2% of gross income.
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5.4 Methods of determining the value of property
(depreciation, capitalised value, development methods):
• Solution:
• Here, given,
i. Cost of land = Rs. 55,00,000.00
ii. Gross income = Rs. 1,20,00,000.00
iii.Expenses undergone per year:
a) To run cinema including staff salary, electricity charges,
municipal taxes, license fee, stationary and printing etc. is 30%
of gross income = (30/100)xRs. 1,20,00,000.00 = Rs.
36,00,000.00
b) Repair and maintenance of plants, machinery and tools at 5%
of their capital cost which is Rs. 1,00,00,000.00 = (5/100)x Rs.
1,00,00,000.00 = 5,00,000.00
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5.4 Methods of determining the value of property
(depreciation, capitalised value, development methods):
• Solution…
c) Sinking fund for machinery whose life is estimated as 30 years at
5% after allowing 10% scrap value. Total amount of sinking fund
to be accumulated in (n=30) years (Sn) = (90/100) x Rs.
1,00,00,000.00 = Rs. 90,00,000.00
Now, annual amount of sinking fund for machinery = (Sn x i)/
[(1+0.05)30–1] = Rs. (90,00,000.00 x 0.05)/[(1+0.05)30 -1] = Rs.
1,35,462.92
d) Insurance premium is Rs. 1,55,000.00 per year
e) Annual repairs of hall = 0.02 x Rs. 1,20,00,000.00 = Rs.
2,40,000.00
• Outgoings = Rs. 36,00,000.00+Rs. 5,00,000.00+Rs.
1,35,462.92+Rs. 1,55,000.00+ Rs. 2,40,000.00 = Rs. 46,30,462.92

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5.4 Methods of determining the value of property
(depreciation, capitalised value, development methods):
• Solution…
• Assume years purchase for 60 years at (R) = 8% and
redemption of capital (this means recovery of capital for the
specified years) at (R1) = 4%, use this value to find sc
• sc = R1/[(1+R1)n-1] = 0.04 / [(1+0.04)60 -1] = 0.0042
• Now, year’s purchase (Y.P.) = 1/(R+sc) = 1/(0.08+0.0042) =
11.88
• Net income = Gross income – Outgoings
• = Rs. 1,20,00,000.00 – Rs. 46,30,462.92
• = Rs. 73,69,537.08

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5.4 Methods of determining the value of property
(depreciation, capitalised value, development methods):
• Now,
• Capitalised value = Net income x Y.P.
• = Rs. 73,69,537.08 x 11.88
• = Rs. 8,75,50,100.51
• Total value of the property = Capitalised value + Value of
land
• = Rs. 8,75,50,100.51 + Rs. 55,00,000.00
• = Rs. 9,30,50,100.51
• (In words: Nine crore thirty lakhs fifty thousands one
hundred rupees and fifty one paisa only)

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5.4 Methods of determining the value of property
(depreciation, capitalised value, development methods):
 Tutorial 3 (Development method): A real estate agency
desires to purchase a potential land for colony planning
measuring 30 hectares in area. After developing this land for
housing colony investor wants to sell the plots at the rate of Rs.
2,800 per sqm which is prevailing in the vicinity and includes
earning of net profit of 20% from sale. Workout the maximum
compensation which can be given to the owners, whose land is
to be acquired for the developing of the plots, assuming 30%
land area is to be provided for roads, parks, drainage and other
public amenities. Colony development charge is Rs. 12.00 per
sqm. Engineers’ and architects’ fee for surveying and planning
of the colony is 5% on the sale of plots.

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5.4 Methods of determining the value of property
(depreciation, capitalised value, development methods):
 Solution:
• Given:
 Total land area (A): 30 hectares = 30 × 10,000 sqm = 300,000
sqm
 Sale price of plots: Rs. 2,800 per sqm
 Net profit desired: 20% of total sales
 Land used for public amenities (roads, parks, drainage,
etc.): 30% of total land
 Colony development charge: Rs. 12.00 per sqm
 Engineers’ and architects’ fee: 5% of the sale of plots
• Step 1: calculate the saleable land area
• Out of the total 300,000 sqm, 30% is used for public amenities.
Therefore, the saleable land area is:
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5.4 Methods of determining the value of property
(depreciation, capitalised value, development methods):
• Saleable area=Total area×(100−30)%=300,000×0.70
=210,000 sqm
• Step 2: Calculate total revenue from plot sales
• Total revenue=Saleable area×Sale price per sqm
• =210,000×Rs. 2,800=Rs. 588,000,000
• Step 3: Calculate net profit desired
• The investor wants a net profit of 20% of total revenue:
• Net profit=0.20×588,000,000=Rs. 117,600,000
• Step 4: Calculate total costs
• The total costs include:
 Land acquisition cost (compensation to owners): Let this be C.
 Colony development charge:
• Development charge=Total area × Rs. 12 = 300,000× Rs. 12 =
Rs. 3,600,000
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5.4 Methods of determining the value of property
(depreciation, capitalised value, development methods):
 Engineers’ and architects’ fee:
• Fee=0.05×588,000,000=Rs. 29,400,000
• Step 5: Relate revenue, costs and profit
• The total revenue is the sum of total costs and net profit:
• Total revenue=Total costs +Net profit
• 588,000,000=C+3,600,000+29,400,000+117,600,000
• Step 6: Solve for C (Compensation to land owners)
• 588,000,000=C+150,600,000
• Or, C = 588,000,000−150,600,000
•  C = Rs. 437,400,000
• The maximum compensation that can be given to the land
owners = Rs. 437,400,000
• (In words: Four hundred thirty seven million four hundred
thousand rupees only)
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5.5 Preparation of valuation report:

Valuation Sample Format.pdf

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End of Presentation
Thank you!

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