CHAPTER 13.

0
COST, PRICE AND VALUE
Once i went to buy Apple at Koteswor Chowk and asked to
vendor that at how much rupees he wish to sell Per Kg? He
said Rs. 250.
I requested to give at Rs 200/Kg. and He said no. He paid Rs
210 at Kalimati and had to Pay Rs 10/kg extra for
transportation. So in total he spent Rs 220/kg fo the apple.
I was not willing to pay more than 200 on that day and he
was not willing to give so I returned Empty.
Three figures: COST ; PRICE and VALUE
MATCH the Following:
1. Rs 250 -------- a. Cost
2. Rs 220 .......... b. Value
3. Rs 200 ..... c Price
In the mean time another
person bought the Apple 5
Kg of Apple at @ Rs 240

So, Value for that person is

Rs 240 per kg and for me it
was 200
 Cost, Price and Value
• Cost:
– Cost is the original cost and the original cost may be either
construction cost or a purchase cost.
• Price = Cost + Profit
• Value:
– Value means the present (current) salable value of the property.

Note: Value may either less than or greater than the cost or
Price

If Value > Price = You buy product /Service

And if Value< Price then you don’t buy the Product/Service
Next Day, I went to buy the Apple and the
Vendor was not willing to sell the apple @ not
less than 250 Rs per kg but I did not have any
other choice so bought 2 kg.

So value of Apple was 250 Rs/Kg next Day.

Conclusion: Value is always relative

Differs from person to person; time to time
 So, Value
differs from
a. Person to Person;
b. Time to Time;
c. Place to Place;
d. Organization to Organization
I have a mobile Phone One Plus Nord
CE 5G bought one year ago @ Rs
52000 and fully functional.
What is its Value?
 BV = I (1-r)^n
I = 52000
r = 25% [1/N, N is useful life]
n=1
Bv = 39000..
Applicable is Declining Balance Method of Depreciation for
tax purpose

Clas Deprecia
Asset Included tion Rate
s (r= ..%)

A Buildings, structure and similar works of a 5%

permanent nature

B Computers, fixtures, office furniture and office 25%

equipment

C Automobiles, buses and minibuses 20%

Construction and earth-moving equipment and

D any depreciable asset not included in another class 15%
 Valuation of Land
Area of the Land = 4 ana
1. Market Rate – 25 Lakh Per anna

Value of Land = 4 x 25 = 100 Lakh= 1 Crore

 Valuation of Land
Area of the Land = 4 ana
1.Government Rate is 10 lakh per anna
2.Market Rate is 25 Lakh Per anna

Value of Land =
4 x [10x0.4 + 25x0.6]
= 76 Lakh
 Valuation of Land
Area of the Land = 4 ana
1.Government Rate is 10 lakh per anna -
[20-40%] weightage

Market Rate – 25 Lakh Per anna - [60-80%]

Weightage

Value of Land = 4 x [10x0.3 + 25x0.7]

= 82 Lakh is the fair market value
DISTRESS VALUE
 Numerical

A freehold residential property consisting of a house

having plinth area of 300 square meter constructed 20
years ago on a plot of land measuring 900 square meters
is proposed to be purchase by Mr. Ganesh for his use.

The present rate of construction of similar building is Rs.

25,000 per square meters and the cost of land is Rs 1500
per square meters. Life of a building is 75 years and
salvage value is 10 %. Advise Mr. Ganesh on what cost
he should purchased the property
 Solution
a. Value of Land Calculation
Area of Land= 900 sqm..
Rate of land = 1500 / sqm
Value of land = 900 x 1500
= 13,50,000
Value of Building:
a. Straight line method:
Value of new building = Plinth area of the building x Plinth area
rate (existing)
= 300 sqm x 25000 Rs per sqm
= 75,00,000
I = 75,00,000 ; Sv = 10% of 75,00,000 = 750000
Life of the building = N= 75 years
Period of construction = n= 20 year
Total Depreciation = n x [ I-Sv]/N =20X [75-7.5]/75 Lakh=18L
Value of Building = I – Total depreciation = 70-18 = 57 Lakh
 Value of Property

= Value of Land + Value of Building

= 13.50+57
= 70,50,000 Lakh
Calculate the Value of property using Declining
balance method of depreciation

Bv= I (1-r)^n\
=75(1-1/75%)^20
= 57.34 lakh
Where I is the Present Value of the Building
r = Rate of Depreciation
n = Years of Construction
N = Life of the building
 Value of the Property

• 70.8416 Lakh – Declining balance

• 70.50 Lakh – Straight Line method

• Use Lower value

Calculate the Value of property using
Declining balance method of
depreciation
 Depreciation Method of Valuation

Value of property = Depreciated Value of building + value of land

PEA’s Gross earning = 30,000 x 10000 =30,00,00,000
per year
Outgoings are Rs 10,00,00,000
The Net Income = 30 – 10 Crore
Capitalized Value = CV [CW] = ?
How much rupees you have to put aside, i.e. Deposit
in an Bank so that you can earn Rs 20 crore Each
year?

P [CW] = A/ i = Where I is the Bank Interest Rate

If I = 8% per year then [Take it maximum]

PV [CW]= 20 crore/0.08 = 250 crore

Years Purchase(Yp):
Yp is defined as the capital sum required to be invest in order to receive an annuity
of Rs. 1.0 at certain rate of interest.
The YP reflects the time value of money in converting a flow of income into a lump
sum.
For 4 % interest rate per annum, to get Rs 4 it requires Rs 100 to be deposited in a
bank
To get Rs 1.0 per year it will be required to deposit 1/4th of Rs 100 i.e. Rs 25
Therefore,
For in-definite period (based on single interest),

where ‘ ip’ highest prevailing rate of interest for capital in decimal

For definite period (based on decimal interest),

Where, ‘ ic ‘ is coefficient of sinking fund

where, ‘ i ‘ is rate of interest for sinking fund (for redemption of capital) and ‘ n ‘
is life of structure
• Sinking Fund
– Accumulation of fund to replace the structure

Where S is total Sinking Fund to be deposited and

I is lowest prevailing rate of interest
If your yearly net income from the office is Rs 500000
what is the Value if the life of your asset is 25 Years?
a. If life is infinite = 500000/i= 50,00,000 if i= 10%
b. But if it has to be replaced after 25 years then you
have to put certain amount per year so that you can
replace that asset with that amount after 25 years. So
that is SINKING FUND
 Calculation

A A

0
1 2 25 27 50

P=? P=?
P=?

Convert P into A using

A1 = P [ ix(1+i)^N /(1+i)^N -1]
and Make A = A1 and P=?
 Sv Sv
Calculation -2 A1 =5 A

0
1 2 25 27 50

A 2= …P
P=?
Keep first P as it is and Convert remaining Ps into Annuity – A -2 and
Using the formula

P + [(P –Sv) {i/(1+i)^N -1}]/i = A/i

But
Take i minimum [5%] market value while using SFF and Take
maximum value for Capitalization [i-max=8%]
P = [A1 –A2]/i-max. A2 = PxSFF
So, P = A/[SFF + i-max]
 Solution
SFF = i/[(1+i)^N -1] where i = 0.07095
A2= 40 Lakh x 0.07095 = 2.838 Lakh
Deposit Rs 2.838 L per year for 25 years and it
will be Rs 40 lakh at the end of 25 years.

P=?
 Introduction
• Valuation is the technique of assessing the
present fair value of the property.
• Valuation is an art of determining actual
unbiased, legal and logical value of the
property
• Property may be the land, building, both land
and building, factory, machineries, jewelries
and other engineering structures of various
types.
• The value of the property depends upon its
structure, life span, location, maintenance etc
 Purpose of Valuation
• The main purpose of the valuation are listed as
follows:
– Buying and selling of property
– Taxation (local bodies tax , property tax and wealth tax)
– Rent fixation
– Security for loan or mortgage
– Compulsory acquisition
– For insurance
– To determine the court fee
– To prepare the balance sheet of company
– Partition of the property
 Principle of valuation
• Costs depends upon supply and demand
• Costs depends upon its design, specification and
location
• Costs varies with the purpose
• Costs depends upon age and condition of property
• Costs depends upon the psychology of the buyer
and seller
• Depends upon the present and future use of the
property
• Costs analysis must depends upon the statistical
data
Refer Examples from
Manmaya and Ram bir
 Valuation of Building
Total floor Area: = 2500 sqft.
Rate adopted for the given type of Building = say
3000 Rs /Sq ft
Value of Newly built Building of that area
= 2500 x 3000 = 75 Lakh
But if it is built 5 years ago;
Using declining balance method of depreciation [RCC
building r = 1.3% (1/N) where N = 75 years]
Value of Building = 75 (1-1.3%)^5 = 70.25 Lakh
 Total Value of the Property
SN Value of Land Value of Bldg Total
Value

1 76 Lakh 70.25 Lakh 146.25

Lakh
Example from the Valuation Report
Building Owner:-Mrs. Pasang Doma Tamang
Existing Property :-Ward No:- 03, Nagarjun Municipality , Kathmandu
Sn. Description Unit Rate (Rs.)
1 Brick masonry in c/s mortar Cu. Ft. 274.19 per Cft
2 Stone masonry in c/s mortar
Cu. Ft. 197.39 per cub ft
3 PCC(1:2:4) work for RCC
Cu. Ft. 258.78 per cubft
4 Cement Plaster (1:4) c/s mortar
Sq. Ft. 26.79 per sq. ft.
5 Cement Paint
Sq. Ft. 15.00per sqft
6 Steel reinforcement
K.G. 100.00 per k. g.
7 Doors/windows frames
Cu. Ft. 4500.00 per cub. ft.
8 Glazed window, wooden frame
Sq. Ft. 550.00 per sqft
 Particulars Units Discriptions
Type of Building Residential
1 Description of Structure RCC framed structure
2 A. Plinth area main residence as per
Metropolish
Ground Floor Sqft 689.32
First Floor Sqft 689.32
Top Floor Sqft 550.601
Total Plinth Area Sqft 1929.24
3 Plinth area as per Measured
i Total Area Sqft 1929.24
Area Taken for valuation Sqft 1,929.24
4 Plinth area rate 2,800.00
5 Value of Structure 5,401,872.00
6 Electrification (@0 %) -
7 Water supply & Sanitation @ 5%) 270,093.60
8 Internal Finishing (@ 0 %) -
9 Total Value of the building 5,671,965.60
 Factors affecting the value of the
property
• Here are some factors that affects the value of
the property
– Location
– Climatic condition
– Population census
– Supply and demand function
– Rate of interest
– Topography
– Rent restriction act
– Security on capital
– Abnormal condition
– Purpose
 Terms used in Valuation (value
classification)
• Gross income
• Net income
• Outgoings
• Municipal taxes
• Scrap value
• Book value
• Salvage value
• Market Value
• Distress value
• Monopoly Value
• Assessed value
• Speculative value
• Gross income:
– Gross income is total income and includes all receipts from
various sources
• Net income:
– Saving left after deducting all outgoings from gross income.
– Net income = Gross income – outgoings
• Outgoings
– Outgoings are the expenses required to maintain the
revenue of the property.
• Taxes: Taxes are fixed on the basis of annual rental value and
includes municipal tax, property tax, wealth tax which are to be
paid by the owner after deduction of annual repairs.
• Repairs: annual repairing cost of property. Usually 10-15 % of
gross income or gross rent.
• Management and Collection Charges: 5 to 10 % of gross rent.
• Sinking fund: it is the fund where certain amount of gross rent is
accumulated to reconstruct or to replace the property
• Loss of rent
• Miscellaneous
• Book Value
– Amount shown in the account book after allowing
depreciations.
• Book Value = original Cost- Depreciation
• Salvage Value
– It is the value of the property at the end of its utility
period without being dismantled.
• Scrap Value
– It is the value of dismantled property (materials)
after deducting labor charge to dismantle. Usually 8-
10 % of total cost of construction.
• Distress value:
– Distress value is the value of the property at financial
difficulties. It is always lower than the market value
due to insufficient knowledge of property valuation.
• Monopoly Value:
– Value of monopoly in nature and is always greater
than the market value.
• Assessed value:
– Value recorded for the municipal taxes.
• Speculative Value:
– Value Based on opinion on guesswork rather than
knowledge.
• Obsolescence:
– It is the loss in the value of property due to old
design, out of fashion, out of date.
• Capital Cost:
– It is the total cost of construction including land
or the original total amount required to posses a
property.
• Capitalized Value:
– It is the amount of a money whose annual
interest at the highest prevailing rate of interest
will be equal to the net income from the
property. This value is equal to the forecasted net
income for the specified time period.
Capitalized value = Net income * Years purchase
Year’s purchase = interest rate
• Depreciation
– It is the gradual reduction in the value of property
due to wear and tear, decay, obsolescence. It
depends on the longevity of the structure, physical
condition, usage etc. Accumulation of fund to
replace the structure
• Types of depreciation
– Physical depreciation (wear and tear)
– Function depreciation (inadequacies,
obsolescence)
– Location depreciation (up or below and at the
road level)
• Methods of Calculating Depreciation
– Straight line Method

– Constant Percentage of Depreciation

If Salvage Value is Given Otherwise r = 1/N
– Sinking Fund method of Depreciation
At the End of Depreciation Total Book value
for the year Depreciation
1st year A A C-A
2nd year A+b 2A +b C- (2A +b)
3rd year A+b+c 3A+b+c C- (3A +b+c)

Where A is annual sinking fund, a,b,c are rate of interest on

sinking fund and C is original cost of construction

- Quantity Survey Methods (Unit Rate method)

 Qualification of Valuers
• Planning, Designing and Construction works
• Surveying and leveling
• Estimating and quantity surveying
• Knowledge on market rate of land
• Rate of interest
• Knowledge regarding rent act, and other prevailing acts
and regulations
• Building codes and bye-laws
• Knowledge on Vastu Science
• Report writing skills
• And other required computer skills
 Various methods of valuation
• Cost based method of valuation

• Plinth area method --- ditto ----

• Rental method --- ditto ----
• Profit based method --- ditto ----
• Capital value comparison method --- ditto ----
• Development method --- ditto ----
 Cost based method of valuation

• Most accurate Method of valuation

• Cost estimates is required from the drawings

Value of property = value of building by detailed cost estimate – total depreciation +

value of land

Where,
Rate of depreciation
 Rate of depreciation
Class Asset Included Depreciation Rate (%)
A Buildings, structure and similar works of a
permanent nature - 5%
B Computers, fixtures, office furniture and
office equipment - 25%
C Automobiles, buses and minibuses - 20%
D Construction and earth-moving equipment
and any depreciable asset not included in
another class 15%
 Plinth Area Method of Valuation

• Most Popular Method of valuation

Value of property =
Total plinth area or built up area in meter square * prevailing plinth area
rate per meter square – total depreciation + Value of land

Where,
 Rental Method of Valuation
• Value of property = Capitalized value + Value of Land
• Capitalized Value = Net rent * Years Purchase
• Net rent = Gross rent- outgoings

Where, Years purchase

Where :
‘ ip’ highest prevailing rate of interest in decimal
ic ‘ is coefficient of sinking fund
‘ i ‘ is rate of interest for sinking fund and ‘ n ‘ is life of structure

Profit Based Method of Valuation

• Use in valuation of commercial property like cinema hall, hotel, complex etc

• Value of property = Capitalized value + Value of Land

• Capitalized Value = Net rent * Years Purchase
• Net rent = Gross rent- outgoings
 Numerical for Method 4 – To be submitted by
the end of this week

A R.C.C framed structured 4 storied building having a cubic

content of 1400 square meters was constructed 15 years ago on a
freehold land (measuring 1100 square meters). The building fetches
a rent of Rs. 14000 per month. What amount will you recommend
for a advancing a loan to the owner against the mortgage, if the rate
of land in that area is Rs 500 per square meters.
Insurance premium Rs 900 per annum, repair and maintenance 8 %
of gross rent, Mgmt and Collection charges 8 % of gross rent, Taxes
30 % of gross rent. Assume future life to be 60 years. Rate of
interest be 8 % and redemption of capital is 5%. Loan advice 50-60
% of value
 Numerical for Method 5 – To be submitted by the end
of this week
• Workout the valuation of cinema hall from the following data:
– Cost of land Rs 1,20,00,000
– Gross income Rs. 75,00,000
– Expenses as follows:
• To Run cinema including staff salary, electricity charge,
minimum tax, stationeries etc 30 % of gross income
• Repair and maintenance cost of machineries and
equipments is 5 % of capital cost which is Rs. 9,50,000
• Sinking fund for machineries whose life period is 25
years at 4 % after allowing 10 % scrap value
• Insurance premium Rs. 10000 per annum. Assume yp for
60 years at 5% and redemption of capital at 4 %. Assume
repair of hall is 2 % of gross income
 Capital Value Comparison Method of Valuation
• Use in valuation of land by
comparing the adjacent and nearby
land value
Development Method of Valuation
• Land Plotting
• Use by Planning authority
• Commonly use in commercial basis by private
entrepreneur
• Developed Value = Cost of Land + Cost expenses in
development
 Numerical to be submitted by the end of this Week

• A town planning authority has to acquire an area of 3500

square meters for the development of new colony. After the
developing the area it is proposed to be sold at Rs 45 per
square meters. Workout the maximum compensation which
can be given to the land owners whose land is to be
acquired for the development, assuming
– The authority establishment charge is 15 % on sale price
– 40 % area is to be provided for roads, parks and other
public utilities
– Colony improvement expenses Rs 7 per square meters
– Engineer fee for whole works is 4 % on sale price
 Numerical to be submitted by the end of this Week

A farmer has a land of 4 hectare adjacent to the newly developed small

town. A business man wants to include the farm land into the town after
developing it into a new colony having plot area each with 200 square
meter. The current sale price of land near vicinity is Rs.2500 per square
meter. The business man is thinking of 25 percent net profit after selling
the developed plots. Work out maximum price of the land at which the
business man may purchase from farmer. The expenses during the
colony development are as follows:
• Cost of leveling and dressing of land @ Rs. 20 per m2
• Cost of providing public facilities like road, sanitation drain, drain, water
supply and electricity (covers 30 % of gross land) @ Rs. 30 per m2
• Architects, planners and Engineer’s Fee @ 2 % of Sale Price
• Land Registration and Local bodies Fee (Tax) @ Rs. 6 per m2
• Other Miscellaneous Expenses @ 0.5 % of sale price
 Report Writing
• After completing all calculations works and measurement if
necessary the valuation report is prepared and submitted to
the concerned departments. The valuation report is prepared
and submitted in the standard format approved by the
concerned department.
• It consist of three parts
– Part I
• Deals with all details about property
– Part II
• Calculations and final value as curtained by valuator
– Part III
• Valuator’s declaration
Finally Annexure is attached as a supporting documents