UNIT - V VALUATION 5A INTRODUCTION Valuation is the process of assessing the current worth or cost of any property twed on its present condition. Properties may be movable or immovable property Any property Which could be moved from place to place can be categorised as movable property, €.g-, vehicles, coal, oil, building materials, etc. On the other hand, lands. tuildings, mines, trees, quarries, etc., fall under immovable category. Valuation is basically on the principle of economics. The factors which may be influencing, i.e., appreciating or depreciating, value of a property demand on different conditions and locations. Hence, thorough and methodical approaches have to be made in valuing a property. Thus valuations is the art of assessing the present fair value of a property at a sued time. Valuation of anything is an estimate of the value of that thing in terms of money. Thus value of a thing depends mainly on its utility, scarcity and events Value of thing is different from cost and price of the same thing. For example. if we consider a building, cost means the actual cost of construction whereas value Means the present market value which may not be the same as the cost of construction. On the other hand, price is an amount worked out adding the cost of production. iuerest on investment, reward to the producer for his labour and risk. Thus value pends on supply and demand whereas cost is a constant amount required for the “onstruction, 82 Necessity FOR VALUATION Necessity for valuation may arise for one or more of the following reasons iia akrabarthi, 2013): aSs = Estimation, Costing and Valuation Engineering * Purchase for investment or for occupation * Tax fixation ° Sale «Rent fixation + Insurance premium * Mortgage value or security of loans * Compulsory Acquisition © Speculation * Betterment charges « Wealth tax and Estate duty « Gift Tax * Probate «Partition * Assessment of Income or stamp fees * Capital gains tax . The above factors are discussed below. 1. Purchase of Investment or for Occupation Valuation may become necessary so as to invest the moncy for purchase of some property. In the same way the money be invested to get certain occupation Such a valuation may depend on the income from the property in comparison to the money market interest and the possibility of cost increase. For the occupation purpose the valuation influences the choice of the purchaser and may be more than its market value. 2. Tax Fixation The valuation is essential by the municipal authorities so as to fix up the icipal tax which depends on the class of city and trade importance. 3. Sale Valuation becomes absolutely essential for the sale of a property which depends upon the market price. Sellers consider this assessed value as a reserve price belo’ which the seller will not accept any offer less than this pri This reserve price should be minimum price excluding all potential, speculative and monopoly. values. 4. Rent fixation In order to fixing of a standard rent or a fair rent as per Rent Control Act. there is a necessity for valuation. oeInsurance Premium In order to fix y ist IP inst is needed to determi ‘ured value of a property excluding the cost of land, valuation "e the insurance premium. 6. Mortgage Val 5 ‘ue or Security of Loans 0 aS tO raise . proce ercnnas ae Against a security of property its value is needed, By the + the quantum of money that has to be advanced against the mortgage of the property is determined 7. Compulsory Acquisition For a i i Ca eee eg. a highway, a property has to be acquired by the Government | case compensation for such acquisition is given by the " Owner of the property. In order to fix the amount of compensation, a valuation of the property is necessary. This is assessed at the current market price of the property. 8. Speculation A short period valuation, called speculation value, is needed when a purchase is intended for sale of a property so as to make some profit. In general, speculative value is lesser than the market value. 9. Betterment Charges In certain times, value of a pro} roads, land development and improvin} - charges of fees, valuation is needed before the comple erty may appreciate because of providing new other amenities. In order to fix up betterment ion of area development. Estate Duty of or Government fixes 4 mi en ot estate tax shall be taxed by the oF estate has to be made. limit beyond which wealth tax 10. Weather Tax and wn of the property estate For this case, valuatio ae i as to pay the Gift Tax sess the value of a gifted property S° It is also necessary 1° me penefician: Aft tax to the Government PY ;os * Estimation, Costing and Valuation Engineering 12. Probate In order to inform a court that the written paper purporting to be the will of a | person who has died his lawful act the official copy of a will is to be presented to the court along with stamp fees. The value of stamp fees is based on the valuation of the property. 13. Partition In case of partition of a property, the market value of the joint property has to be determined before informing the share of money through the property to the beneficiaries. 14. Assessment of Income or Stamp Fees In case of a newly built up property, the income tax authorities need the valuation of the property so as to assess the source to built the property and the annual return from the property so as to fix the income tax. 15. Capital Gains Tax Taxation on capital gains is meant gains realised when a capital asset is disposed off and the proceeds exceed the costs incurred in acquiring the asset. 5.3 TYPES OF VALUATIONS Value of a property has been classified differently under different conditions which are explained below. 1. Scrap Value Scrap value is the value of dismantled materials. At the end of utility period of a building, the dismantled materials as steel, bricks, timber, etc, may fetch a certain amount which is the scrap value of the building. The scrap value of a building may be about 10% of its total cost of construction. In order to get the scrap value, the cost of dismantling and removal of the rubbish material is deducted from the total ; receipt from the sale of the useable materials.> vawation 55 1 Salvage Value salvage value is the value at the end of the utility period without being dismantled. A material after the completion of its usual span of life or when it become uneconomic, may be sold and one may purchase the same for use for some other purpose, the sale value of the material is the salvage value. It does not include the cost of removal, sale, etc. Normally, the scrap value, or the salvage value of a property or an assct has got some positive figure, but it may also be zero or negative. For example the scrap value of a RCC structure will be negative as dismantling and removal will be costly 3. Market Value It is the amount which can be obtained at any specific time when the property is put for sale in the open market. According to demand and supply, the market value will differ from time to time. For miscellaneous reasons such as changes in industry changes on fashions, means of transport, cost of materials labour etc. the market value of also changes from time to time. 4, Book Value It is the amount shown in the account book after allowing necessary depreciations Book value of a material is the original cost minus the amount of depreciation up 'o the previous year. Basically it depends on the amount of depreciation allowed per Year. This will be reduced year after year and reach the scrap value at the end of the utility period. 5. Rateable Value It is the net annual letting value of a property. This is obt the amount of yearly repairs from the gross income. charged at a certain percentage on this value of the pr ined after deducting and other tires are roperty 6 Assessed Value It is the value of a property recorded in the records of a municipality inorder '0 determine the amount of municipal taxes to be collected for the property. Generally the assessed value is determined from the gross annual rent less an allowance of ten Percent for the cost of repairs and other maintenance needed for a building A; Seseenere- Estimation, Costing and Valuation Engineering 7. Distress or Forced Sale Value In a situation wherein a property is sold at a lower price than the market value at that time, it is said to have a distress value, Such a distress may be caused due to any one of the following reasons: (i) Financial difficulty of the seller (ii) Court decree (iii) Insufficient knowledge of the seller (iv) Quarrel among partner (v) Panic due to war or riots or civil commotion 8. Replacement Value It is the present value of a property or portions thereof if these have (0 * replaced at the current market rates. 9. Potential Value When a property is capable of giving more return due to its alternative us: +! by advantageous planning or by providing some development works, such inh value of a property is known as potential value. 10. Monopoly Value If a land is scarce in a particular area or if certain properties have come sis! ay demand fancy prices. This is kno" advantageous over others, then the owner 1 as monopoly value. 11. Sentimental Value In a situation when a property is sold or purchased at a higher value thi? the market value due to some sentiments in the mind of owner or purchase is called sentimental value. —La votuation 57 iz. Speculative Value yr widening ‘Acertain land may have speculation to be as a highway, a water line 0} which of highway, ete in future, Speculators purchase such property at a low price g, known as speculative value. 13. Reversionary Value Present value of an amount deferred for a certain period at a fixed rate of interest is known as reversior value. 5.4 SINKING FUND The fund which is gradually accumulated by way of periodic on annual deposit for the replacement of the building or structure at the end of its useful life, is referred to as sinking fund. In general, any object, viz., a building, a machinery, etc becomes snueable after certain years, i.e., life span of the object. In order to give life to the object, the sinking fund is created. This is done by regular annual or periodic deposits in compound interest bearing investment or by taking a sinking fund policy with an insurance company. In the case of a building, the calculation of sinking fund depends on the life of the building and scrap value of the building for the cost of old materials. For land sinking fund is not required as the land remains intact. The amount of annual instalment of the sinking fund may be obtained from the formula. J=——_ (a+i"-1 Where, 7 = Annual instalment required $= Total amount of sinking fund to be accumulated n= Number of years required to accumulate the sinking fund. i= Rate of interest in decimal.58 n, Costing and Valuation Engineering 5.5 CAPITALISED VALUE The capitalized value of a property is the amount of a money oe annual imerest at the highest prevailing rate of interest will be equal to the net income from the property. For example if a property produce a net income of Rs.8000/- per annum and a purchaser derives 8% return on his capital according to the highest prevailing rate he should pay Rs.8000 xia. Rs.100,000/- maximum for the property. This amount of Rs.100,000/- is capitalised value of the property. Higher rate of interest, lower will be the capitalised value of a property and vice-versa. On the other hand, the capitalised value of a properly does not lower down, inspite of higher bank interest. This is due to the fact that rent goes up and so more will be the net annual return. 5.5.1 Problems on Capitalised Value [ca prostem] 5.1] A building in an A class city is let out @ Rs.5000/- per month. The total outgoings of the property is estimated to be 15% of the gross income, calculate the capitalised value of the property if the present rate of interest is 8% and the life of the property is 50 years. # Solution: Given Gross rent = 5000 x 12 = Rs.60,000/- per year Outgoings = 15% of gross rent _ 60000 x 15 100 Rs.90000/- per year Net rent = 60000-9000 =Rs. 51000/—ator V i Since the life xpectan Icy ii i . perpetual hence 'S quite lengthy therefore, the income is considered to Y-pot_l | R™ 0.06 = 16.67 2. Capitalised value = 1 =51 ou 000 x 0.06 Capitalised value = Rs. 850000/— Incase sinking fund allowance is also to be accounted for 1 Then Y- P= but S,= R+S, © (1+R)"=1 ¥. p=—006 — _ 0.0034 (1 + 0.06) p=! __.15.77 0.06 + 0.0034 . Capitalised value (C.V) = 51000 x 15.77 C.V =Rs.8,04,270/- [@ prostem | 52 “A building whose plinth area is 700 sq.m mas constructed ue years ago having the Cost of land as Rs.30,000/- Find the capitalised value allowing for depreciation etc., In case this building needs immediate repair of aseaaeenle what is the net value of the building. Take the present cost by ee per sqm as Rs.500/- The tte of interest 6% for depre ciation and further life of building 50 years. 4 Solution: 0 =60 years) Sinking fund coefficient (for 50+ 10=00 y R_____0.06__ Sc GaRy1 (1 +0.06)°oN * $10 Estimation, Costing and Valuation [9c 19 : ; (+L Amount of Re.I/- per annum in “n" years at “R" rate of interest a (1 +0.06)!9-1 Amount of Re.l/- after 10 years =~ 96. =Rs. 13.81 Where, ny = 10 years Rate of depreciation in 10 years = 13.81 x 0.0019 = 0.0263 or 2.63% Present cost of the property = 700 x 500 = Rs. 3,50,000 Total depreciation = 350000 x 288 = Rs.9205/— Depreciated cost of building = 3,50,000 - 9205 Depreciated cost of building =Rs.340795 Total Capitalised Value (a) Depreciated cost of building = Rs.340795.00 (b) Value of land = Rs.30000.00 Total = Rs.3,70,795.00 Repair cost = Rs.25,000.00 Net value = Rs.3,95,795,004 three storied building is stan din pith area of each storey is agg . on a plot of land measuring 800 sq.m. The iad the future life may be taken as ae The building is of RCC framed structure month. Work out the capitali years. The building fetches rent of Rs.1500/- ield. For sinking fund 3% com, zed value of the property on the basis of 6% net nay be taken as Rs.40/- per sq ave interest may be assumed and cost of land jm. Oth ; ' fi per annum be assumed suitably, fer data required for working out the outgoings p Solution: Gross income per year = 1500 x 12 = Rs.18000.00 Assuming suitable data for outgoings per annum (i) Repair @ 10% of gross income = 1800015 = Rs. 1800.00 (i) Municipal taxes @ 20% of gross rent = 18000 x 20 = Rs,3600.00 5 (iii) Property tax @ 5% of gross rent = 18000 x 755 = Rs.900.00 6 (iv) Management and collection charges @ 6% of gross rent = 1800 x 799, = 1080.80 05 _ (vy) Insurance premium @1/2% of gross rent = 18000 x 759 = Rs.90.00 7 = —= = Rs.360.00 (vi) Miscellaneous charges @ 2% of the gross rent 18000 x 100 s. ‘ he building in 70 years ; a d to accumulate the cost of (vii) Sinking fund require © 3% interest = 180000 x 0.0043 = Rs.774.005.12 ® Assuming plinth area rate as RE ISO/ per sqm the COR OF py = 400 © 3 150 Rs 180000 00 " 5. £ 0.03, 0.0042 (errr aaoye og Total outgoing per annum 1800 + 3600 + 900 + 10RD © 906 M60 oy Re 8604.00 Net Annual return 18000 — 8604 = Re 9296 00 CV = Net rent % P Cost of land = 800 « 40 = Rs 32000 CV = 9306 x a” = 156600 Total value (J) PROBLEM J An RCC framed structure building having estimated future life of 80 years, fetter a gross annual rent of Rs.2200/- per month. Work out its capitalized value om ‘he basis of 6% net yield. The rate of compound interest for sinking fund may de The other outgoings are (i) Repair and maintenance = 5 of gross income (ii) Municipal and property taxes = 25% of gross income (iti) Management and miscellaneous = 7% of gross income The plinth area of the building is 800 sq.m and cost per sqm may de wake ® Rs.500/- per sqm 4 Solution: Gross annual rent © 2200 12 = Ry 20400) Rate of compound interes’ © 4% Life of building = 800 = S00 = Ry.4,00,000/ator ve outgoings i (i) Repair and mai ntenance = 1/) = V2 x 26400 = Rs. 2200/- (ii) Municipal Taxes = 25 s = 25, 100 * 26400 = Rs.6600/- (iii) Management and Mi: Miscellaneous = —— = Ous = 755 x 26400 = Rs.1848/— (iv) Sinking fund = 400000 x0, (1+0.4)8— 1 =Rs.731/— Total outgoings (i + ii + iii + iv) = Rs.11379/- Net income = Rs.26400 - 11379 = Rs.15021/— Capitalised value = (Years purchase) x (Net income) where years purchase = 6% “. Capitalised value = 102 x 15021 = Rs.250350 C.V = Rs.250350— PROBLEM 5.5 | bout Rs.70000/- stands_on a main road on a t value of a Paar af r round ent per annum is Rs295/- The building is of RCC ehold plot oe ir is estimated that the building will have a future life of Sramed structure type- ne building is Rs.400/- per month. The taxes payable are 0 years. The rent of t ‘insurance premium is 0.5% of the gross rent. Assuming 18% of the gross rent "4 1” ie usual outgoings, determine the capitalised uitable figures for OCT TNT. of a 5% net yield. The sinking fund coefficient slue of the property on & in 70 years at 3% is 0,0043. capital + the replacement of the CaP!oe Estimation, Costing and Valuation Engineering 5.14 ae Solution: Gross income per annum = (400 « 12) = Rs 4800/7 Deduct outgoings 1. Ground rent for the use of land = Rs 295/ 2. Taxes (0.18 x 4800) = Rs.864/ 3. Insurance (0.005 x 4800) = Rs.24/ 4. Sinking fund required to replace Rs.70000/- in 70 years at V% (0.0043 x 70000) = Rs. 301/- 5. Repairs (assuming at 10% of the gross rent) = Rs 480/- 6. Management charges (assuming at 5% of the gross rent) = Rs.240/- 7. Life charges (assuming at 2% of the gross rent) = Rs.96/— Total amount of outgoings = Rs.2300/- Net income = (4800 — 2300) = Rs.2500/- -. Capitalized value of the Property = (year purchase) x 2500 * 2500 _ 100 5 5.6 DEPRECIATION Depreciation is the gradual exhaustion ol the uselulness of a property, That is, it is the loss in the value of the Property due to its use, lite, wear, tear, decay and obsolescence. Thus the value of @ building or any property other than land decreases gradually up to the utility period due to depreciation. Usually tor a simple computation 1 certain percentage of depreciation per annum is allowed. The general decrease in— 515 aie of @ property ss at the beginning ¥ is 561 Types of Depreciation The three main depreciations are 1, Physical Depreciation, 2. Functional Depreciation 3, Contingent: Depreciation }, Physical Depreciation Physical depreciation may be due to * Wear and tear from operation * Decrepitude (i) Wear and Tear from Operation This type of depreciation may be attributed to equipment which looses is » due to wear and tear. For example, a motor vehicle whose value decreases with engine capacity which looses its full capacity due to wear and tear Another cxamp!s is a railway wack. (ii) Decrepitude Physical depreciation may also be due to actjon of time and the elements calle decrepitude. For example, the outside plastering of a building may Peel off due to loss of its adhesive capacity for the action of ume 2 Functional Depreciation jation is determined based on the units of use of performance Functional deprec' Tather than age. In this type of de ge. An automobile tyre is 4 BOOS preciation, SOF due t funcuonal ail LW due bo 1 example under this category 3. Contingent Depreciation Such a type of depreciation ™'Y be due to— 5.16 Estimation, Costing ond Valuation Engines, (i) Accidents (due to structural effects and negligence). (ii) Diseases (pollution, parasites, etc) (ii) Diminution of supply (natural gas, water/etc.) 5.6.2 Methods of Assessing Depreciation Following are the methods adopted to assess depreciation 1. Suaight Line Method 2. Constant Percéntage Method 3. Sinking Fund Method 4. Quantity Survey Method In all these methods, it is necessary to decide the economic or effective life of the property. 1. Straight Line Method This method is based on the assumption that the loss in property value, is same amount every year. A fixed amount of the original cost is deduced every y so that at the end of utility period only the scrap value is left. Then c-Ss Annual depreciation, D = Where, C= Original cost S= Scrap value n= Life of the property in years The book value after N number of years is given as [original cost) (- VD)) 2. Constant Percentage Method This method is property will lose i every year. That is also called as Declining Balance Method. It is assumed that the value by a constant percentage of its value at the beginning of Va | (5.3) ale Annual depreciation, D = 1 ( ®wan ee pased on the above metho depreciated cost of the Property at the y ty at the end MW first year Cy = C— DC at the end ¢ and so on, nd of secand year Cy = Cy ~ DC) 4 sinking Fund Method In this method the di a qual sinking fund plus ee Of the property is assumed to be equal to the e 's the interest on the fund for that year, Thus Annual Sinking Fund = where x= Life of the building i= Rate of interest in decimal ‘As discussed earlier sinking fund is an amount which has to be set fixed intervals of time out of the gross income so that at the end of the useful of the property, the fund should accumulate to the initial cost of the property life 4. Quantity Survey Method In this method the property is studied in detail. That is the loss im yaluc determined due to life, wear and tear, decay, obsolescence, etc. Each and every step is based on some logical ground without any fixed percentage of the cost of the property. Only experienced persons can iN DEPRECIATION, SINKING FUND UURCHASE assess the depreciation based on this method 5.7 PROBLEMS 0! AND YEAR OF P' PROBLEM | 5. | 12000/-. Assuming its salvag en constructed for Rs. Rs.3000/- determine the value amount of depreciation and book A temporary shed has be at the end of 6 years 4s | value for each year by L. Straight line method | 2. Constant percentage 3. Sinking fund method. method end5.18 Estimation, # Solution: 1. Straight Line Method Given C= Rs.12000/- S=Rs.3000/— n=6 years -S§ D=—— n 12000 - 3000 6 9000 The amount of depreciation and book value for below. Costing and Valuation Engineering each year is given in Table Age in Depreciation Total Book value at the years depreciation end of the year = Rs.12000/- 1 Rs. 1500/- Rs.1500/- Rs. 10500/- 2 Rs.1500/- Rs.3000/- Rs.9000/- 3 Rs.1500/- Rs.4500/- R..7500/- [4 | Rs.ls00r- Rs.6000/- Rs.6000/- 5 Rs. 1500/- Rs.7500/- Rs.4500/- 6 Rs.1500/- Rs.9000/- Rs.3000/-< ntl 5.19 constant Percentage Method h In | 12000 P=1-0.7936 1 P=0.2064 . The amount of depreciation and book value for each year is given in Table velow. Age in on Total Book value at Depreciati year | Depreciation | erreciation | the end of year = Rs.12000/- 1 Rs.2477/- Rs.2477/- Rs.9523/- 2 Rs.1965/- Rs.4442/- Rs.7558/- 3 Rs.1560/- Rs.6002/- Rs.5998/- 4 Rs.1238/- Rs.7240/- Rs.4760/- 5 Rs.982/- Rs.8222/- Rs.3778/- 6 Rs.778/- Rs.9000/- Rs.3000/- \. Sinking Fund Method It will be necessary to find out the dey Spying the following two formulas. preciation percentage for each year by i reer Where, n= total life of shed n=6 years"Engines, i aotat-1 i Where, n= age of shed in years from 1 to 6 Then Depreciation percentage = (1, A) x 100 Here A = annual sinking fund to replace (12000-3000) Rs.9000/- in 6 years at 4% The total depreciation and value at the end of each year is given in Table below, Age in Depreciation % Total depreciation | Book value at years Ax(1) the end of year = Rs.12000.00 1 15.08 Rs.1357.20 Rs.10642.80 2 30.76 Rs.2768.40 Rs.10642.80, 3 47.07 Rs.4236,30 Rs.9231.60 4 64.04 Rs.5763.00 Rs.6236.40 5 81.68 Rs.7351.20 Rs.4648.80 6 100.00 Rs.9000.00 Rs.3000.00 PROBLEM [57] Calculate the life of building at which its salvage value will be about 10% by adopting the following rate of interest in W.D.V method of computing depreciation (1) 2.5% (2) 5% #) Solution: Given In case 2.5%, P= In case of S%P=5ce At 2.5 percentage WDV= CK py W.D.V = 0.10 ana P=25 9.10C = C1 ~ oops = 90.95 = n=19 yenry ose 2 At 5 percentage W.DC=0.10C and P=5 Substituting 0.10 = C1 - 0.05" n= 44.89 = n=45 years @ prostem| 5.8 | The cost of newly constructed building is Rs.455000/- Calculate its W.D.V at the nd of 25 years by adopting percentage of depreciation as 2.5 and 5. 4 Solution: Given n=25 years P=2.5 and 5% Case i: At 2.5 percentage W.D.V at end of 25 years | =(1-P)" t or commencement of 26" year =(1- 0.025)" = 0.531 WDV for Rs-455000"- = (0.531 x 455000) .D.V for Rs. = Rs.241605/—Bn Rn $22 Estimation, Costing and Valuation Engineering Case 2: AUS percentage W.Dv at end of 25 years = (1 py"=(1 ~0.025)?5 = 0.277 or commencement of 26'" year W.D.V for Rs.455000/- = 0.277 x 455000 6035, ( PROBLEM [59] Calculate the depreciated replacement cost of building having the following particulars by adopting straight line method and sinking fund method. Total built up area of all the floors = 350 m2 Age of the building =25 years : Total life of building =70 years Scrap value at the end of useful life =10% Percentage for sinking fund =5% Assume present rate of construction as Rs.1300/- per m?. Comment on the results obtained by two methods. # Solution: Given 1. Straight Line Method Prime cost of building at present = (1300 x 350) = Rs.455000+ Scrap value at the end of the useful life = (0.10 x 455000) = Rs.45500/- er _C-S_{ 455000 - 45500 )_ 409500 CULT 700 Depreciation per year = Rs.5850/— Total depreciation = (25 x 5850) = Rs.146250/—valuation 5.23 Depreciated replacement Cost of building = 45500 - 146250 Rs.308750/- 2, Sinking fund method The depreciation percentage at 5% for the life of 70 years and age of years works out to 8.114 Total depreciation = (0.08114 x 409500) = Rs.33227/- Depreciated replacement Cost of building = (455000 - 33227) Rs.42177: It is thus seen that depreciation arrived by straight line method is nearly ( 146250 33227 [a Proaew [570 A building was constructed 40 years ago and is till existing in sound condition and hence can be presumed to serve for another 70 years. Find the depreciation of building if today’s cost of construction of similar building is Rs.250000/- assume salvage value 10% of present construction cost. -s40 times more than that obtained by sinking fund method. * Solution: Given Building age © = 40 years Construction cost = Rs 250000/— = 10% Salvage valueCn 5.24 Estimation, Costing and Valuation Engen 50000 — 25000 = Rs. 2,25,000 Depreciation base Today's total depreciation of building if todays cost of construction of simija, building -—40 40+70 x 2,25000 = Rs 81818/— Todays value of building = 250000 — 81818 = Rs. 168182 ie, approximately Rs. 1.70 lakh. [E2 proaten er] The total cost of machinery including the installation charges in a factory is Rs.120000/-. Calculate the depreciated cost of the above after 15 years. The salvage value is Rs.8000/- The span of life is 40 years. # Solution: Given C=Rs. 120000 S=Rs. 80000 n=40 years c-S Annual Depreciation = _ 120000 - 8000 = 40Depreciation for 15 528 Years = 2809 X15 = Rs.42000 Depreciated cost of f the Machinery ‘after 15 years = Rs. 120000 — Rs. 42000 = Rs 78000.00/— Book value after 15 years = 120000 — 8000 - 42000 = Rs.70000/- Groans inking fund oa oe ee = pee 4 property is estimated to Rs.50000/- whose future life en e yearly instalment of sinking fund which should be set aside # Solution: Given R=5% =0.05 n= 20 years Coefficient of sinking fund instalment R (1+R)"-1 ie 005 (1 +0.05)0-1 5, = 0.0302 t of sinking fund = 0.0302 x 50000 = Rs.1510/- per year Yearly instalmen5.26 Estimation, Costing and Valuation Engines, o2 Estimation. Costing re etneerng [ch raoaLen a A property has been purchased by a person at a cost of Rs.40000/- excluding the cost of land. Determine the amount of sinking fund annually deposited at the rae of 5% compound interest. Assume the future life of the building as 30 years ang scrap value of the building materials as 10% of the cost of purchase. # Solution: Given R=5%=0.05 n= 30 years The total amount of sinking fund to be accumulated at the end of 30 years. 90. 5 = 40000 x 35 Sy, = Rs.36000 ‘ one Sn xR Annual instalment of sinking fund “s” =—-"——"— (+Ry"-1 _ 36000 x 0.05 © (1+0.05)0=1 1800 Annual instalment of sinking fund required for 30 years = Rs 541.35fp PROBLE jeulate the value of years a rate of interest is 5%, Bu Purchase for a property if its life is 20 years and My : r sinking fund the rate of interest is 4 1/2%. t Solution: Given R=0.05 Ry = 0.045 n= 20 years Coefficient of sinking fund installments Ry Se - (1+R)"-1 S 0.045 (1 +0.045)°2- 1 S, = 0.0319 1 Year purchase (¥.P) = F054 00319 Y.P=12.21 5.8 ESCALATION The cost of materials and labour are not constant over a period of contract. But they range day to day. These aspects need tO be considered in completion period of a big project which may take long time. to force the magnitude of such future increase ler. The result is that the contractor may not ¢ to high rise of basic cost. Ultimately, It is impossible for a contractor at the time of submission of his tend : find interest to carry out the projet work &Y eee work.5.28 Estimat ting ond Valuation Enginging In order to circumvent such drawbacks many Government Departments Provide the price escalation clause in the tender, On the other hand some contractors themselye, incorporate escalation condition while submitting tenders. As per Central Government Norms, the price escalation is governed by 4, following formulae for materials and labour (Chakrabarthi, 2012). 1. For Materials 70 100 Wi - Wo Wo 0.88V -(C + S) x (5.5) Where, Vm = Variation in material cost, i.e., increase or decrease in the amount in Rupees to be paid or recovered. V= Value of workdone, during the period under recokening excluding advances on material, if any. C= Cost of cement used in the work S= Cost of steel used in the work. W, = Average All India whole sale Price Index for all commodities for the period under reckoning as published. Wo= Average Alll India whole sale Price Index for all commodities during the month of opening of the tender as published. Values of C and S at a particular time is computed as (Quantity concurred) x (Bank rates as fixed by the authority) If the contractor has to procure C and S$ then no deduction shall be made in the above formula. 2. For Labour 30 I-ly ma os87 (C+S)x To a Where, —_V, = Variation in labour cost, i.e., increase or decrease in amount in rupees to be paid or recovered.> vawation 5.29 T= Average All India Consumer Price Index Number for industrial works declared by Labour Bureau, Government of India as published during the period under reckoning. Ig = All India Consumer Price Index Number for industrial workers declared by the Labour Bureau, Government of India, as published during the month of opening of the tender. V, Cand S are as stated for adjustment in materials. In case, the bill is submitted prior to 15" of a particular month, Index for that month will not be reckoned for calculating the average indices for arriving at the adjustment. 5.9 VALUATION OF LAND Valuation of open land may be done by any one of three methods as and where applicable. * Comparative method * Belting method %* Hypothetical building schemes. 5.9.1 Comparative Method ‘The simplest and most direct method of valuation is direct comparison. The method . is based on instances of other sales with dates of open comparative like lands in the neighborhood so there are main two factors on which this method is based on: 1. Sales prices Sales prices should be recent so that there is no rise in value of land during the intervening period of comparison. 2. Similar neighbourhood lands ‘The method is based on a comparison of like to like. Properties may be similar but each property is unique SO that they can never be like. The value of particular plot may be adjusted with sales some, what similar plots by analyzing by the following factors. :ean Land located at Popular areas for closeness to schools, markets, Office, » Will be more than slum areas due to existence of bustees, factories, burning Bhat “tc. The comparative value of land may be adjusted by comp: Per sq.m for such vi tee aring the expected Tent ariations for locations. (8) Size: The size of @ plot of land plays an important role on its value of lang Should be compared with similar size. Plots. Whi Small plots are sold at a higher rate tha en the area of similar big plots he 2 times that of normal plot general demand, the value of big plots should be 12 1/2 to 15 per cent le: Shape: A considerable area of irregular built Up area for residential Purpose though sor included to make up the compulsory vacant sp (iv) Frontage and depth: The Proportion of road frontage and depth of plot in shopping area the frontage Sreater is the value of land. For residential Purpose also ‘on between frontage and depth is more than 2 the value of land should be Proportionately less. bigger Shaving ss shaped plot cannot be utilized as q me of the irregular portions may be ace required by municipal by laws where the Proporti (v) Return Frontage: A comer Plot having roads on two sides known as return frontage will be valued more than the normal plot having the same are with front road only, (vi) Vistas: when there be a Joint the first road at the front of a plot of land then itsis said to have second road vista.’Due to Uninterrupted view increased natural ventilation the land having a visti Fig. 5.1 vistas (viii) Nature of soil: Lands of filled up areas hav, natural land, The foundation cost for a proposed by © a lesser bearing capacity a : i uilding will be more if the 5% have a lower bearing capacity than adjoining area,too we 5.31 sot Belting Method of Valuation ! | raph value of a plot of land has a pr | Sa great bear greater value than back | 7 Breat bearing on its road frontage. Frontage land Lae ro and. So in order to find out a more realistic value of qd the entire plot is divided ii . wane into a number of convenient strips by lines parallel to ihe cere line of the road. Each such strip of land is k TI Eac ‘ , ip of and is know as belt. The depth of front belt is judicially -ywertained on : 7 consideration to what depth of the land does the maximum value aend. Ascertaining a rate per sq.m of land for the first belt the value of is worked out. used lands for front belt, second belt R and TBR are rec Fig. 5.2 SBR and '” id third belt respectively After ach belt by respective related rate per unit ares fh belt the value of the entire plot of land can be known belting method of valuation. Multiply the area of ¢ Summing of the value of eac! This system of valuation is known as nd is divided into three belts. and the depth of the third belt at 1 1/2 depth remaining after second: belt is The depth of second belt a hat of front belt ond belt or Normally the plot of | taken as 1 1/2 times to © ‘mes than the depth of the sec Considered as the depth of third belt5.32 Costing and Valuation Engineering 5.9.3 Direct Comparison Method This method consists of ascertaining the capitalised value of a property by direct comparison with capitalised value of few adjoining properties. This method is adopted when the particulars of sale of a few adjoining properties are available. The properties should be similar transactions are to be new and normal, details of each property is known. This method is suitable where it is not possible to know the fair rent like owner occupied properties, schools, clubs and out housed etc., 5.9.4 Profit Based Valuation This is very much similar to the rental method of valuation and is most applicable in case of valuation of hotels, cinemas, shops, etc., In this method net profit is worked out after deducing all possible outgoings including interest of capital investment and also remuneration of labour rendered by owner. This net profit can reasonably be realized in the from of rent and is multiplied by years purchase to determine the capitalised value. 5.9.5 Problems on Valuation of Land [Ei pro stew 515 A property consists of a south facing plot of land, having south East and North sides in due directions, which measures 60 m, 180 m and 80 m respectively. It consists of an old two striped building, having a total cubical content of 2840 cubic meters. Assuming prime cost of construction of the building as Rs.500/- per cubic metre and allowing 10% old materials value only for the building what would you recommend as the fair value of the property, if the front belt land depth of from! belt being 25 m be estimated at Rs.90/- per month? 4 Solution: Depth of front belt =25m Depth of 2" belt = 1.5% 25=37.5 m, Remaining 3 belt depth = 180-25~37.5=117.5mvaluation 5.33 Plot Area in sq.m Area in Terms of F.B Units | 1FB 60 x 25 = 1500 1500 2SB 60 x 37.5 = 2250 22 x 2250 = 1500 3TB 60x 117.5= 7050 "12% 7050 = 3525 4FBR 12x 25 x 2.8=35 3/4 x 35 = 26.25 SSBR 12x (2.84.7) x 37.5 = 183.75 183.75 x 3/4 x 2/3 = 91.87 6TBR —|12(7+20)x 117.5 = 1586 1586 x 3/4 x 1/2 = 594.75 Total = 7237.87 117.5 m SB Line 357.5 FB Line 25m Value of the plot = 7237.87 x Rs.90 = Rs.651403/— Prime cost of construction of the building =Rs.500 x 2840 = Rs.1420000— Old materials value = 10% x Rs.1420000/ = Rs.142000/— value of plot + value of building Rs.65 1403 + Rs. 142000 = Rs.793403— Sting eee PROBLEM Work out of the value of a tank 1000 sqm in area 3 m average depth. The Present cost of carried each including filling the tank be Rs.12 per cum. It is estimateq that a period of 10 years shall be passed for natural consolidation and by this time the value of solid land is expected to be Rs.400 per sq.m consider 20% excess earth for consolidation and interest on capital to be 12% p.a. # Solution: Quantity of earth Tequired = 1000 x 3+20% = 3600 cum Cost of filling = 3600 x 12 = Rs.43200/— Future cost of solid land = 1000 x 400 = Rs.400000/- Present value of Rs.1/- receivable at the end =— _ -0332 (1+0.12) Presents value of the tank = 400000 x 0.332 - 43200 = Rs.85600/— PROBLEM A property is proposed to be developed on a south facing plot of plot of land on @ 340 m wide road having a frontage of 30 m and depth of 60 m. The front belt may be taken as up to 25 m with the value fixed at Rs.400 per sq.m. for the front belt land. An eight storied building having a overall height of 30 m above the ground is proposed to be constructed with 5 m Space on the east 1.3m on the west and 12 m on the north. If to cost of construction is Rs.70 per cubic m and rentable area is 60% of covered area, find the average rent to be realized pet sq.m of rentable area for investment to yield @ 81/4% gross. Solution: Plot | Area in sqm 1-PB /30.x 25 =750 Area in terms of FB units = 750 2-SB_ 135 x 30= 1050 1050 x 23 = 700 Total = 14950 sq.mtion —_ 2m - lam sal FB Line 6m 25m Road = Value of the plot = 1450 x Rs.400 = Rs.580000 Now floor area of the building = 48 x 23.7 Volume of building = 1137.6 x 30 = 1137.6 sqm = 34128 cum Prime cost. = Rs.70 x 34128 = Rs.2388960/— Investment in building and land =Rs.2388960 + Rs.580000/- = Rs.2968960/— Rent to be reali for 8 Y% % on investment Gross rent Rs. 2968960« 54 = Rs.244939.20 xg But rentable area of 8 story = 1137.60 % oT = 5460.48 qm = Rs.244989.20 + 5460.48 5 sqm Rent to be realize per = 44.86Oo = 5.36 Estimation, Costing and Valuation Enginaeneg J PROBLEM | 18 Find the value of the plot of land ABCDERGHIKLMNPQRG which the lengths of different sides are given in figure. Assume the following; (i) on 12 m wide road, the front belt depth is 24 m and the value of front bey land is Rs.60/- square metre. (ii) on 6 m wide road, the front belt depth is 18 m and the value of front bey land is Rs.40/- per square metre. AB=18M JK=24M BC=9M KL=9M CD =60M LM=27M DE=6M MN=9M EF=24M NP=42M FG=9M PQ=6M GH=18M = QR=27M HJ=36M. AR=30Moust” 5.37 p Solution Considering 12 M wide road frontage, the 3 belt land value Rs.1/2 x 60 =Rs.30 per sq.m. Considering 6m_ side road frontage (rear value of second belt land Rs.26.67/— per sqm which is less than Rs.30/-. But front beld land value 3px 40= = qm Rs.40/- which is more than Rs.30/-. In such cases consider the maximum value of land. Plot Area in sq.m ‘Area in terms of front belt units FB-1 36 x 24 = 864 = 864 3/4 x 54 = 40.50 FBR-2 |9x6=54 SB-3 27 X27 +9 x 18 =891 2/3 x 891 = 594] SBR-4 [18x 9+ 15x 18= 432 3/4 x 2/3 x 432 = 216 TB-5 42 x 18 = 756 12 x 756 = 378 12 x 3/4 x 630 = 236.25 TBR-6 42 x5 = 630 38 x 54 = 20.25 TBR-7 6x9=54 Total = 2349.00 sqm Value =Rs.60 X 2349 = Rs.140940/— Be ee .21600/— 1 belt land = 540 x Rs.40 = Rs.’ = Rs.140950/- Value of rear fron! 4 Rs.21600/— = Rs. 162540/- Total value of land§.38 Estimation, Costing and Valuation Engineering 5.10 VALUE OF BUILDING * Value of a building depends on several factors as * Type of building Its structure and durability * Size, shape and frontage « Width of roadways * Quality of materials used and» Present day prices of materials, for construction * Further the other factors which also contribute for the value of a building are * Height of the building « Height of plinth * Thickness of wall « Nature of floor * Roof, and + Doors and windows %* — Value of a building will have higher value when located under the following location compared to other places: * Buildings located in market area + Area having sewer, water supply and electricity * Free hold land Keeping all the above aspects, the valuation of a building mainly depends on the income it can fetch if it is let out. Usually 6% interest per annum of the capital cost is taken as annual rent, it may be more or less according to the prevalent market rate. Basically valuation of a building is determined on working out its cost of construction at present-day rate and allowing a suitable depreciation. 5.10.1 Present-Day Cost Present-day cost may be determined by the following methods (Dutta, 2013). |. Cost From Record Construction cost of a building may be determined from the estimate, from the bill of quantities, based on the record at present day rate.. Knowing the actual cost of construction, this cost may be increased or decreased according to the percentage rise or fall in the rates which may be obtained from the P.W.D, schedule of rates. eewig as ae valuation, A i 2, Cost by Detaileg Measu, If record is n¢ ae ‘Ot availabl, ; a = . vl of quantities ae the cost of Constructi each item is considereg eats OF K ted mau ates. All the i 8S prevalent in shen ed detailed mi he rt fr a —— re sen ae ee easurement. The rate for " current PWD schedule of specification ascertaj ld be ined as actually exist, thoroughly scrutinised and their detailed 3. Cost by Plinth Area Ba: a This is a simy ple method area of the building is 7 = e in the locality is obtained and then ae c involve elaborate measurements. The plinth sent plinth area rate of a similar building ‘ost of the building is assessed. 4, Depreciation Determination After deciding the co: st of the buildi is necessary to allow a suitable ee ae ae , 1e cost. The quantum of depreciati depends on the ultimate use ildi " ae of the building, the present the bui of maintenance, etc. prea ome of pe mags mars 5.10.2 Methods of Valuation Following: are the different methods of valuation (Dutta, 2013): Rental method of valuation Direct comparison of the capital value Valuation based on the profit Valuation based 0” the cost Development method of valuation od of valuation + + FF OF Depreciation meth outgoings are deducted Valuation ed first and all the market L thod of Rental Me ae ise oo te of interest as prevailing in the ig method, the 85 jtable ral eae a t income multiplied by year’s income t the net ine jg calculated. This net ; Find lial) Fas purchase or vation of He Proper, method can is assumed and apitalized ¥ wn or probable reat is determined by enquiries. ow “yes the Purchase (Y.P) give tne rent is be used only wher2. Direct Comparison with Capital Value ~ This method is preferred when the rental value is not available from the concerned property. On the other hand 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. 3. Valuation Based on Profit This method of valuation is mostly suitable for profit making buildings such as hotels, cinema halls, theatres, etc. whose capitalized value depends on the profit. In such cases the annual income is arrived at after deducting all working expenses, outgoings, interest on the capital invested, etc. from the gross income. The net profit is multiplied by year’s purchase to get the capitalized value. In such situations the valuation made may be too high in comparison with the cost of construction. 4. Valuation Based on Cost In this case the total expenditure incurred in constructing the building or in Possessing the property is taken as basis to determine the value of the property. In this type of assessment necessary depreciation should be allowed and the feasibility of obsolescence should also be considered. 5. Development Method of Valuation This method of valuation is used for the Properties which are in the undeveloped or partly developed or party undeveloped stage. This type of valuation may be adopted when a large area of land is tequired to be divided into plots after providing for toads, park, etc. In such cases, the probable setting price of the divided plots, the area allotted for roads, parks, etc. and other development should be known. In case of building, which is to be renovated by making addition, improvements or alteration, the development method of valuation may be adopted. Here the valuation of the property may be worked out from the anticipated future net income which it may fetch after its renovation.Valuation 541 velwation 6. Depreciation Method of Valuation In this method of valuation, primarily the building should be divided into four parts, viz, walls, roofs, floors and doors and windows. Based on detailed measurement ‘of the above components, the cost of each part should first be worked out on the present. The life of each of the four parts should then be ascertained and the depreciated value of each part is got by the formula ‘a es rf we | (5.7) Where, D= Depreciated value P= Cost at present market rate rd= Fixed percentage of depreciation and n= Number of years the building had been constructed Table 5.1 Values of rd Age of structure rd value 100 years of life 10 75 years of life 1.30 50 years of life 2.0 5 years of life 20 years of life and water supply. electric and sanitary fitting, ete. nt value of land f the building. The preset should be added t0 the value ©5.42 Estimation, Costing and Valuation Engineering 5.11 PROBLEMS ON VALUE OF BUILDING (Gi PR atew eo A first class building is situated on a main road of the city, having plot area 600 sq.m. The covered area is 50% of the plot. All amenities such as water Supply, Sanitary and electricity are provided. The age of the building is 20 years. The assumed plinth area rate at the time of construction was Rs.250/- per sqm. Assume life of the building as 100 years and cost of the land as Rs.70/- per sq.m. Find the total value of the property. # Solution: 1 Plinth area of the building = 50% of the plot area (003) 300 sq.m Cost of the building = 300 x 250 = Rs.75,000 n 00 - The depreciated cost of building, D = P ( “a | rd for 100 years =1 = 75,000 x 0.818 = Rs.61350,00 The cost of land = 600 x 70 = Rs.42000.00 “+ Total value of property = 61350 + 42000 pS Total value of property = Rs.103350.00valuation, A building is situated by the side of main road in a city on a land plot of 500 sq.m. the built up portion is 20 mx 15 m. The building is first class type and is provided with water supply, sanitary and electric fitting. The age of the building is 30 years work out the valuation of the property. Assume plinth area rate at time of construction to be Rs.350/- per sq.m and life of the building is 100 years. Take cost of land to be Rs.250/- per sq.m. 4 Solution: Plinth area of building = 20x 15 = 300 sq: m Cost of building = 300 x 350 = Rs.105000 The depreciated value of building 100 ~ rd Y" p=e( em } where P= Rs.105000/- n= 30, rd= 1.0 considering life of the building as 100 years 30 100-1 b= roso00x{ 100 ) 30, 90. = 105000 ( 00 ) = 105000 x 0.738 D=Rs.77490/— Cost of land = 500 x 250 = Rs.125000 Total valuation of property = 77490 + 125000 Total value of property = Rs.202490.005.44 Estimation, Costing and Valuation Engineeing” SM tiation, Costing and Vaiston Enpreig (Ga Frosiew| em A freehold plot of land measures 600 m”. It is situated in middle class locality, 4 three storeyed building stands on the plot with the following particulars, find oy the value of the Property. Built up area on ground floor = 180 m? Ground floor = 1/3 of plot area Total carpet area of three floors =250 m? Average net rate of rent per m” of Carpet area (excluding local taxes) = Rs. 4/— Estimated future life of building = perpetuity Estimated rate of land = Rs.40/- per m* Amount of usual outgoings = 1/6 of gross rest Rate of interest for capitalization = 7% # Solution: Gross annual rent = (4 x 250 x 12) = Rs.12000/- Usual outgoings = (1/6 x 12000) = Rs.2000/- Net annual rent = (12000 - 2000) = Rs.10000/- Year purchase allowing interest of 7% in perpetuity is 14.3 Capitalized value = (14.3 x 10000) = Rs.143000— Add Extra open land available for further construction = (600-180 x 3) = 60 m? Value of extra open land = (40 x 60) = Rs.2400/- Total value of the property= (143000 + 2400) Total value of property = Rs.5400/—valuation 5.45 (Gr ProaLen [529 A residential flat on third floor in multistoreyed building has been let out for an annual rent of Rs.36000/-. The amount of Rs.26000/- levied by the local authority as taxes is to be paid by the tenant. It is further agreed that the expenditure on repairs in respect of the property will be borne by the tenant. If the land is freehold calculate the value of property as per schedule III Part B for section 7(1) of W.T Act. The flat was purchased by the owner with cost of acquisition as Rs.400000/- in 1975. # Solution: Actual rent received by owner as per item (5) (i) = Rs.36000/- Local taxes paid by tenant as per item 5(1) = Rs.26000/- Increase due to repairs by tenant as per item 5(i) (ii) (1/9 x 36000) = Rs.4000/— Total = Rs.66000/— Deduct 1. Local taxes as per item 4 (i) = Rs.26000/— 2. Outgoings as per item 4 (ii) 0.15 x 66000 = Rs.9900/— = Rs.35900 Net Maintenance rent as per item 4 = Rs.30100/- Multiplying factor as per item 125 Value of the property = 12.5 x 30100 = Rs.376250/— 5.12 CALCULATION OF STANDARD RENT The rent of a building is fixed on the basis of certain percentage of annual interest on the capital cost and all possible annual expenditures on outgoings. ‘The capital cost comprises of 1 Cost of raising, levelling and dressing site 2, Cost of construction of building.