VALUATION

SHALIKA MEHTA

DISCOVER . LEARN .
EMPOWER
 Valuation
• Technique of estimating the fair value of a property
is termed as ‘Valuation’.

• Present value of the property is decided by its

selling price or rent it may fetch.

• Value of property depends on its structure, life,

maintenance, location, bank interest, legal control
etc.
 Continued…..
• Original cost of construction of purchase is known
as ‘Cost’.

• ‘Value’ means the present value (saleable value)

which may be higher or lower than the cost.
 Continued…..
• ‘Gross Income’ is the total income and includes all
receipts from various sources before deductions.

• Amount left after deductions from the gross income

is known as ‘Net Income’.

• Difference of gross income and outgoings is known

as ‘Net Income’
Net Income = Gross Income- Outgoings
 Outgoings and types of outgoings
• Expenses required to be incurred to maintain the revenue of
the property is known as ‘Outgoings’.
Types of outgoings:-
• Taxes
• Repairs
• Management and collection charges
• Sinking Fund
• Loss of Rent
• Miscellaneous
 Some Important terms:-
• Money taken by municipality by imposing taxes in
order to maintain public utility services is known as
‘Municipal Taxes’.

• Value of dismantled materials is known as ‘Scrap

Value’.
• Scrap value specifically refers to the value of the asset's
components after it's dismantled, while salvage value
considers the asset's potential for resale or reuse
 Continued…..
• Amount shown in the account book after allowing
necessary depreciation is known as ‘Book Value’.
• Amount which can be obtained at any particular
time from the open market if the property is put
for sale is known as ‘Market Value’.

The original total amount required to possess a

property is known as ‘Capital Cost’.
 Depreciation
• Decrease or loss in the value of a property due to
structural deterioration use, life wear and tear, decay
and obsolescence is termed as ‘Depreciation’.

• General annual decrease in the value of a property is

known as ‘Annual Depreciation’.
• Depreciation is the gradual exhaustion of the usefulness of a
property. This may be defined as the decrease or loss in the
value of a property due to structural deterioration use, life
wear and tear, decay and obsolescence. The value of a
building or structure will be gradually reduced due to its use,
life, wear and tear, etc., and a certain percentage of the total
cost may be allowed as depreciation to determine its present
value. Usually a percentage on depreciation per annum is
allowed. The general annual decrease in the value of a
property is known as Annual Depreciation.
 Methods of valuation
• Rental method of valuation.
• Direct comparisons of the capital value.
• Valuation based on the profit.
• Valuation based on the cost.
• Development method of valuation.
• Depreciation method of valuation.
Rental Method of
Valuation
• In this method, the net income by way of rent is
found out by deducting all outgoing from the
gross rent. A suitable rate of interest as
prevailing in the market is assumed and Year’s
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
rupee one at a fixed rate of interest. is
calculated. This net income multiplied by Year’s
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 enquiries.
• Gross Annual Rental Income: ₹60,000
• Annual Expenses: ₹9,000 (property taxes,
maintenance, etc.)
• Capitalization Rate: 6% (or 0.06)
Calculations:
• Net Annual Income: ₹60,000 (Gross Income) -
₹9,000 (Expenses) = ₹51,000
• Year's Purchase: 100 / 6% = 16.67
• Capitalized Value: ₹51,000 (Net Income) *
16.67 (Year's Purchase) = ₹8,49,670
(approximately)
• Therefore, the estimated value of the property
using the rental method would be
approximately ₹8,49,670.
 Direct comparison with the
capital Value

• This method may be adopted when the

rental value is not available from the
property concerned, but there are
evidences of sale price of properties as a
whole. In such cases, the capitalized
value of the property is fixed by direct
comparison with capitalized value of
similar property in the locality.
Valuation based on
profit
• This method of Valuation is suitable for
buildings like hotels, cinemas, theatres etc
for which the capitalized value depends on
the profit. In such cases, the net income is
worked out after deducting gross income;
all possible working expense, outgoings,
interest on the capital invested etc. The
net profit is multiplied by Year’s Purchase
to get the capitalized value. In such cases,
the valuation may work out to be high in
comparison with the cost of construction.
Valuation based on cost

• In this method, the actual cost 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
Development Method of
Valuation

• This method of Valuation is used for the properties

which are in the underdeveloped stage or partly
developed and partly underdeveloped stage. If a
large place of land is required to be divided into
plots after providing for roads, parks etc., this
method of valuation is to be adopted. In such cases,
the probable selling price of the divided plots, the
area required for roads, parks etc and other
expenditures for development should be known
• If a building is required to be renovated by making
additional changes, alterations or improvements,
the development method of Valuation may be used.
Depreciation Method of Valuation

According to this method of Valuation, the building

should be divided into four parts:
1.Walls
2.Roofs
3.Floors
4.Doors and Windows
• And the cost of each part should first be worked out
on the present day rates by detailed measurements.
• The present value of land and water supply, electric
and sanitary fittings etc. should be added to the
valuation of the building to arrive at total valuation
of the property.
Methods of calculating Depreciation
• Straight line method
• Constant percentage method
• Sinking fund method
• Quantity survey method
 Straight Line Method:

• In straight line method it is assumed 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
of the utility period only the scrap value is left.

• The formula for finding depreciation using straight line method is given
below.

• Annual depreciation (D) = (Original cost – Scrap value) / (Life in

year)

• = (C – S) / n
• Where,

• C = original cost

• S = scrape value

• n = life of property in years

• D = annual depreciation

• The book value after the number of years = original

cost – (Number of year × depreciation)
• The present value of machine is Rs. 2,50,000
workout the depreciated cost at the end of 7 year if
the salvage value is Rs. 20,000. Assume the life of
machine 18 years. Use straight line method for
finding depreciation.
• Solution:
• C = 2,50,000 Rs.
• S = 20,000 Rs.
• n = 18 years
• .
• Using straight line method,

• Annual depreciation,
• = (C – S) / n

• = ( 250000 – 20000 ) / 18

• = 12778 Rs.
• Total depreciation after 7 year

• = 7 × 12778

• = 89446 Rs.

• Depreciated cost after 7 years

• = 250000 – 89446

• = 160554 Rs.
 Constant Percentage Method :

• Constant percentage method is also known as Declining balance method.

• In this method, it is assumed that the property will lose its value by a
constant percentage of its value at the beginning of every year.

• The formula of finding annual depreciation using Constant percentage

method is given below.

• Annual depreciation (D) = 1 – (S/C)1/n

• Where,
• C = original cost

• S = scrape value

• n = life of property in years

• D = annual depreciation

• The value of the property of the depreciated cost at the

end of the first year, (C1) = C – DC
Example of Constant
percentage method
• Using above example data,

• C = 2,50,000 Rs.

• S = 20,000 Rs.

• m = 7 years

• n = 18 years
• Total depreciation after 7 year

• = C × (S/C)m/n

• = 250000 × (20000 / 250000)(7/18)

• = 93600 Rs

• Depreciated cost after 7 years

• = 250000 – 93600

• =156400 Rs.
 Sinking Fund Method:

• In the sinking fund method, the depreciation of property

is assumed to be equal to the annual sinking fund plus
the interest on the fund for that year, which is
supposed to be invested on interest-bearing
investment.

• If A is the annual sinking fund and b, c, d, etc.,

represent interest on the sinking fund for the
subsequent year, and C = total original cost.
 Depreciation Total
At the end of Book Value
for the year Depreciation
1st year A A C–A

2nd year A+b 2A+b C – (2A +b)

3rd year A+c 3A+b+c C – (3A+b+c)

C–
4th year A+d 4A+b+c+d
(4A+b+c+d)
 4. 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.
 FAQ’s

• What do you mean by valuation?

• What is scrap value and salvage value?
• What is market value and capital cost?
 REFERENCES

• A hand book of Estimation & Costing by

B.N.DUTTA
• www.engineeringcivil.com
• www.theconstructor.org
• www.slideshare.com
 Thanks
Queries are welcome

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