Definitions
1 Market Value
2 Book Value
3 Capital Cost
4 Sinking Fund Method
5 Direct Comparison With The Capital Value
6 Depreciation Method Of Valuation
6.1 Methods For Calculating Depreciation

**VALUATION: DEFINITIONS**

**1 Market
Value**

The market value of a property is the amount which
can be obtained at any particular time from the open market if the property is
put for sale. The market value will differ from time to time according to
demand and supply.

The market value also changes from time to time
for various miscellaneous reasons such as changes in industry, changes in
fashions, means of transport, cost of materials and labour etc.

**2 Book
Value**

Book value is the amount shown in the account book
after allowing necessary depreciations. The book value of a property at a
particular year is the original cost minus the amount of depreciation allowed
per year and will be gradually reduced year to year and at the end of the
utility period of the property, the book value will be only scrap value.

**3 Capital
cost**

Capital cost is the total cost of construction
including land, or the original total amount required to possess a property. It
is the original cost and does not change while the value of the property is the
present cost which may be calculated by methods of Valuation.

**Capitalized
Value of a Property**

The capitalized value of a property is the amount
of money whose annual interest at the highest prevailing rate of interest will
be equal to the net income from the property. To

determine the capitalized value of a property, it is required
to know the net income from the property and the highest prevailing rate of
interest.

Therefore, Capitalized Value = Net income x year's purchase

**Y****ear's**** Purchase**

Year's purchase
is defined as
the capital sum
required to be
invested in order
to

receive a
net receive a net annual income as an annuity of rupee one at a fixed rate of
interest.

The
capital sum should be 1× 100/rate of interest.

Thus to
gain an annual
income of Rs
x at a
fixed rate of
interest, the capital
sum should be x(100/rate of interest).

But
(100/rate of interest) is termed as Year's
Purchase.

The multiplier of the net annual income to determine the
capital value is known as the Year's Purchase (YP) and it is
useful to obtain the capitalized value of the property.

**4 Sinking
Fund Method**

In this method, the depreciation of a 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 subsequent years and C = total original cost, then -

**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
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.

**5 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.

**6
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.

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, life wear and tear, decay
and obsolescence.

**6.1 Methods
for calculating depreciation**

1. Straight
line Method

2. Constant
percentage method

3. Sinking
Fund Method

4. Quantity Survey Method

**Straight
Line Method**

In this method, it is assumed that the property
losses its value by the same amount every year. A fixed amount of the original
cost is deducted every year, so that at the end of the utility period, only the
scrap value is left.

*Annual Depreciation, D = (original cost of the asset **-** Scrap Value)/life in years*

For example, a vehicle that depreciates over 5 years, is
purchased at a cost of **US$17,000**, and will have a salvage value of**
US$2000**, will depreciate at** US$3,000 **per year:

**($17,000? $2,000)/ 5 years = $3,000 **annual
straight-line** depreciation expense**. In other** **words, it is the **depreciable
cost** of the asset divided by the number of years of its useful life.

**Constant
Percentage Method or 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.

**Annual Depreciation, D = 1-(scrap value/original value)1/life in
year**

**Quantity
Survey Method**

In this
method, the property is studied in detail and loss in value due to life, wear
and tear, decay, and obsolescence etc, worked out. Each and every step is based
is based on some logical grounds without any fixed percentage of the cost of
the property. Only experimental valuer can work out the amount of depreciation
and present value of a property by this method.

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Civil : Estimation and Quantity Surveying : Valuation : Valuation: Definitions |

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