CHAPTER 3 -

VALUATION TABLE:

Meaning & utilities of valuation table

The mathematical combination of simple and compound interest for sinking fund,
depreciation, interest on capital, amount receivable at the end of a given number
of years at a certain rate of interest etc. are calculated through their respective
formula. But these involve elaborate and tedious calculations. Valuation tables are
therefore worked out based on their respective mathematical formula. The tables are
energy saving devices and assist valuers to arrive at a speedy and accurate
calculation. These tables are in the form of ready reckoners and are very easy to
use. But it is necessary for valuer to have a thorough knowledge of the
construction of these tables.

Remuneration rate of Interest

The rates used by the IMF to pay interest and levy charges each financial quarter
are shown here.

The SDR interest rate, calculated every week, is the primary rate from which other
rates are derived. This rate is used to pay interest and levy charges on members
SDR holdings and SDR allocations, respectively.

The basic rate of remuneration is equal to the SDR interest rate. The basic rate of
charge is also equal to the SDR interest rate, plus a margin. Additional burden
sharing adjustments, for the financial consequences of protracted arrears, are also
applied to both the basic rate of remuneration and the basic rate of charge.

The adjusted rate of remuneration is used to pay interest (remuneration) to members

on their remunerated reserve tranche position with the Fund. The

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adjusted rate of charge is applied to charge members on their outstanding credit to

the Fund.

ACCUMULATION RATE OF INTEREST The accumulation function a(t) is function defined in

terms of time t expressing • simple interest: a(t) = 1 + t.i =

a a

= the ratio of the value at time t (future value) and the initial investment
(present value). It is used in interest theory. Thus a(0) = 1 and the value at time
t is given by: where the initial investment is A(O). For various interest-
accumulation protocols, the accumulation function is as follows (with i denoting
the interest rate and d denoting the discount rate):

compound interest: a(t) = (1 + i)? • simple discount a(t) = 1 + =

compound discount: a(t) (1 - d)

td

1-d

= =
In the case of a positive rate of return, as in the case of interest, the
accumulation function is an increasing function.

single rate and dual rate tablestables

Following valuations tables are in use. There is no specific number and those
indicated below are serial numbers only.

SINGLE RATES AND DUAL RATES VALUATION TABLES

TABLE NO. 1

Amount of Re. 1 at the end of a given number of years If Re. 1 is invested @ 5%

compound interest, the same will amount to (Re. 1 + 0.50) = Rs. 1.05 at the end of
first year.

This table shows the amount receivable after a certain number of years at a given
rate of interest.

At the end of second year the same will amount to (Re. 1 + 0.50) X(1 + 0.50) or as
per rule of three:Principal Principal Amount Re. 1: Rs. 1.05 Rs. 1.05 (1.05) X
(1.05) Or

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Or at the end of second year, the capital value of Re. 1 invested will amount to (1
+ p) *(1 + p) (1 + p) 2 where p = rate of interest.

Similarly after 'n' years, the capital will amount to (1 +p) n.

It should be remembered that capital is required to be invested once for all and
not every year,

Use:

1. It forms the basis for construction of other tables. Illustration: Working:

2. It helps in ascertaining the loss of interest on capital locked up in land or in

other project when it remains unproductive.

Work out the amount receivable at the end of 10 years for Re. 1 invested now at 9%.

Amount of Re. 1 after 10 years

= (1 + 0.09) n

(1 + p) n

= (1.09)10

= 2.367

The result can be obtained directly from Table No. I.

Illustration:

A developer has purchased 16.000 S.M. of land at Rs. 500 per S.M. Thereafter he has
sub-divided the plot in small building plots wherein 21% of the area has been lost
in providing of compulsory recreation area and means of access. He has also
incurred an expenditure of Rs. 5, 68,000 towards the cost of development which has
taken a period of two years from the date of purchase. Subsequently he decides to
sell the small plots after a period of 5 years from the date of purchase.

Work out the cost per S.M. given that if he had invested his capital in fixed
deposit in any scheduled bank, he would have obtained the following rates of
interest.

Period of deposit Rate of interest

5 years

11.00%

4 years

3 years

10.00%

9.00%

Working: Part I:

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The developer has locked up his capital of Rs. 500 x 16.000 = Rs. 80 lakhs in land
which has remained unproductive for 5 years. Had he kept the same in fixed
deposits, his capital would have breeded.

Table No. I shows that Re. 1 invested at 11.00% will amount to Rs. 1,685 at the end
of 5 years. This Rs. 80 lakhs will amount to Rs. 80 x 1.685 Rs. 134.80 lakhs at the
end of 5 years.

Part II:

The cost of development of Rs. 5, 68,000 is not required to be paid in one sum at
the commencement of the development work but by installments as the work
progresses. Hence out of two years, loss of interest will be only for one year.

Subsequently for three years thereafter the plots were not sold and hence Rs. 5,
68,000 remained unproductive for a period of 4 years.

Table No. I shows that Re. 1 invested at 10,00% will amount to Rs. 1,464 at the end
of 4 years.

Rs. 5,68,000 will amount to

Rs. 5,68,000 X 1.464 Rs. 8,31,552 Total capital formation if invested in scheduled
bank Rs. 1,34,80,000 Rs. 1,43,11,552

This will represent the cost of 12,640 S.M. of effective saleable plot area, 3,360
S.M. being lost in provision of compulsory recreation area and means of access.
Cost per S.M. Rs. 1,43,11,552

12,640
1,132.24 Working: Amount of Re. 1 @ 9% will accumulate in two years to

Say Rs. 1,132 per S.M.

Illustration:

The tenants of a building have contributed a sum of Rs. 10,000 for the repairs
under a compromise formula wherein the owner has to carry out the repairs of at
least Rs. 25,000. The owner has failed to carry out the repairs for two years and
now he wants 50% of the repair amount of Rs. 25,000 to which the tenants have
further agreed. State what amount should the tenants pay now.

Rs. 1.188

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Amount of Rs 10,000 will accumulate to Rs 10,000 x 1.166 = Rs. 11,880

The balance amount required to be paid by the tenants

Rs. 12,500 - Rs. 11,800

Rs. 620

TABLE NO. 2

Amount of Re. 1 per annum in given number of years

This table shows the amount that can be accumulated in a specified period of time
due to regular investment of Re. 1 at the end of each year at a given rate of
interest. At the end of first year, Re. I will be deposited and as such capital
accumulated will be Re. 1 only. At the end of second year another Re. I will be
deposited whereas the first Re. I will amount to (1 + p), where p = rate of
interest. Thus the capital accumulated at the end of second ycar 1 + (1 + p).

At the end of 3rd year = 1 + (1 + p) + (1 + p) 2 At the end of 'n' year = 1 + (1 +

p) + (1 + p) 2

...(1 + p)n - 1 Let amount of Re. 1 p.a, at p% in 'n' years amount to Rs. 'C'.

:C 1+ (1 + p) + (1 + p) 2...(1 + p)n - 1 Equation No. 1

Multiply the above by (1 + p)

C(1 + p) (1 + p) + (1 + p) 2 + (1 + p) 3...(1 + p) n Equation No. 2

Equation (2) minus equation (1),

C(1 + p) - C = (1+p) n - C(1 + p - 1) = (1 + p)n - 1 (1 + p) n - 1 1 C =

Amount of Re, 1 p.a. in 'n' year at 'p' rate of interest (1 + p)n - 1 Use :

1. This table forms the basis for construction of other tables.

2. It helps in ascertaining amount lost due to regular payment of ground rent or

lease rent while the property remains unproductive.
Illustration:

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invested at

Work out the amount receivable at the end of 25 years for Re. 1 p.a. 9%. Working :

Amount after 25 years @ 9(1+p) n-1

% P 1 (1 + 0.09)25 0.09 Rs. 84.701

The result can be obtained directly from Table No. 2. Illustration: Working:

A lessee has taken on perpetual lease a piece of land admeasuring about 1,000 S.M.
on a ground rent of

Rs. 1,500 per month. After a period of two years when he wanted to commence the
work he was prevented from constructing on account of injunctions from adjoining
owners resulting in litigation. It took a further period of three years to settle
the matter whereby he was required to pay Rs. 30,000 at the end of three years for
extinguishment of casement rights and incidental expenses thereto.

The lessee subscquent to that was not able to commence the work for a period of 10
years from the date of lease and decided to sell the perpetual leasehold rights.
Work out the minimum premium expected by the lessec, assuming the rate of interest
@ 8% Neglect profit to lessee.

1. The plot remains unproductive for a period of 10 years and still the lessee is
required to pay the ground rent of Rs. 1,500 per month or Rs. 18,000 per year.

Amount of Re. 1 p.a. @ 8% in 10 years

Rs. 14.487 (Table No.2)

Rs. 18,000 p. a.will amount to

Rs. 18,000 X 14.487

= Rs. 260766

Thus lessee will have to recover a sum of Rs. 2,60,766 as he has been paying the
ground rent per year whereas the land remains unproductive.

2. The lessee has paid Rs. 30,000 towards the extinguishment of easement rights and
other incidental
cost thereto, which remains unproductive for a period of 7 years.

Amount of Re. 1 p.a. @ 8% in 7 years

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= Rs. 1.714 (Table No. 1) Rs. 30,000 in 7 years @ 8% will amount to

Rs. 30,000 X 1.714

Rs. 51,420

Thus the total amount which he could have obtained if he had invested in other form
of investment

= Rs. 2,60,766 + Rs. 51,420 Rs. 3,12,186

Hence the lessee should at least demand a nct premium of Rs. 3,12,186 for assigning
the leasehold rights.

The illustration shows the use of Table No. I and Table No. 2. Illustration:
Working :

a A local authority has issued a notice to the owner of a building to provide two
water pumps and a suction tank, the estimated cost of which is about Rs. 50,000. A
compromise has been reached whereby the tenants have contributed a sum of Rs.
25,000 without any obligation and the owner has to contribute for the time being
Rs. 25,000, which tenants have further agreed to return after ten years. Work out
the yearly installment required to be paid by the tenants.

Amount of Re. 1 p.a. @ 9% in 10 years

= Rs. 15.193 (Table No. 2) Amount in 10 years Amount in 10 years Amount to be paid
p.a. Rs. 15.193: Rs. 25,000 : Re. 1 = 1 x 25,000 15.193 = Rs. 1,645.49 p. a.

The tenants can invest the installment as worked out above every year at 9% such
that the total of all the installments with interest thereon will amount to Rs.
25,000 in ten years or in the alternative hand over the said installments to the
owner.

Proof: Rate of Interest 9% (Table No. 1) 1st installment in 9 years will am to

Rs. 1,645.49 x 2.172

Rs. 3,574.004

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2nd installment in 8 years will amount to

Rs. 3,279,462

Rs. 1,645.49 X 1,993 3rd installment in 7 years will amount to

4th installment in 6 years will amount to

Rs. 1,645.49 x 1.828

Rs: 3,007.956

Rs. 1,645,49 X 1.677

5th installment in 5 years will amount to

Rs. 1,645,49 X 1.539

6th installment in 4 years will amount to

Rs. 1,645.49 X 1.412

7th installment in 3 years will amount to

Rs. 1,645.49 X 1.295

8th installment in 2 years will amount to

Rs. 2,759.487

Rs. 1,645.49 x 1.188

9th installment in 1 years will amount to

Rs. 2,532.409

Rs. 2,323.432

Rs. 2,130.910

Rs. 1,954.842

Rs. 1,645.49 X 1.090

10th installment in - years will amount to

Rs. 1,645.49 X 1.00

Rs. 1,793.584

TABLE NO.3

Rs. 1,645.490

Rs. 25,001.576
Say Rs. 25,000

Amount sinking fund for the redemption of Re. 1 capital invested

The table gives the annual equivalent which when deposited at given rate of
interest will amount to Re. 1 after a specified number of years. This can be
derived from the table of amount of Re. 1 p.a. as given below: Amount of Re. 1 p.a.
at 'p' rate of interest in 'n' years will accumulate to Rs. (1+p) 1-1 P

Accumulated sum deposited Rs.(1 + p)n-1

Accumulated sum

Annual equivalents to be

Re. 1

Re. 1

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1 x 1 (1 + p) n -- 1/P 1

Amount of Re.I p. a table

Thus it can be seen that sinking fund table is the reciprocal of the amount of Re.
1 p.a table.

Use:

1. It is useful in working out the accumulated sum which might be needed in future
for repairs or

a reconstruction of a building. The calculated annual sum is supposed to be

invested every year at given rate of compound interest such that after the
specified number of years it will amount to desire capital to meet the liabilities.

2. It is also useful in ascertaining the fixed sum required to be set aside per
year so as to meet the loan liabilities, or for the recoupment of the capital
invested in a project after the specified tenure is over

Illustration:

Work out the sinking fund to recoup Re. 1 at the end of 20 years at 4-1/2%.
Working:

Amount of Re. 1 p.a. @ 4-1/2% in 20 years

= Rs. 31.371 (Table No. 2)

Sinking fund

Amount of Re.I p.a table

31.371

Re. 0.319

The same can be obtainable directly from Table No. 3.

Illustration:

An owner has purchased a property consisting of an old building having a future

life of 20 years for a sum of Rs. 50,000, out of which Rs. 10,000 represents the
value of land. What sum should be set aside as sinking fund on 4-1/2% basis?

Working :

Amount of Re. 1 @ 9% at the end of 20 years

= Re.5.604 (Table No. 1) Amount of Rs. 50,00,000 @ 9% at the end of 20 years

= Rs. 50,00,000 X 5.604

31

Rs. 2,80,20,000

Annual sinking fund for the redemption of Re. 1 capital @ 5% in 20 years

= Rs.0.0302 (Table No.3) Sinking fund to be aside and invested so as to redeem Rs.
2,80,20,000 after 20 years

Re. 0.0302

2,80,20,000 X Rs. 8,46,204

Thus the concern will have to set aside every year a sum of Rs. 8, 46,204 from the
profits and to invest the same at 5% compound interest so as to recover Rs.2, 80,
20,000 after 20 years.

Illustration:

An owner has provided a lift in his building at a cost of Rs. 1,50,000. what
portion of the rent he should set aside and invest every year at 5% so as to
recover the said amount in 25 years.

Working :

Annual sinking fund for redemption of Re. 1 @ 5% for 25 years

= Re. 0.0209 (Table No.3). Annual sinking fund for redemption of Rs. 1,50,000

= Rs. 1,50,000 X 0.0209

Rs. 3,135 p.a.

Illustration:

What sum should the owner set aside and invest @ 4-1/2 % from the rent of a
building such that a sum of Rs. 10,000 is collected in 10 years when the building
is likely to need heavy structural repairs? Working:

Annual sinking fund for the redemption of Re. 1 @ 4-1/2% in 10 years

Re, 0.0814 (Table No. 3)

Annual sinking fund for Rs. 20,000

Rs. 20,000 X 0.0814

- Rs. 1,628

TABLE NO.4

Present value of Re. 1 per annum (Year's purchase table)

These tables give the capitalized value of annuities which are either receivable in
perpetuity or for a specified number of years.

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These are classified into (a) Single rate table and (b) Dual rate table. In single
rate table the rates of interest on capital as well as that for its redemption are
same whereas in case of dual rate table, these are different. It should be noted
that even the single rate table incorporates in itself an allowance for sinking
fund and hence it is not necessary while using this table for perpetual income to
make a separate allowance for the same.

Single Rate Table:

Re. 1 invested at p% will amount to Rs (1 + p) at the end Annuity Annuity Rs (1 +

p): Present value Re. 1: Re. 1 1 (1 +P) Present value of first annuity or Re. 1

of first year.

(1 + P)

Similarly for the second annuity it will be

Let 'C' be the present value and term 'n' years.

and so on.

(1 + P2

1 с + +

(1 + P) (1 + P)2 (1 + p)3 On summation of the series,

(1 + P)n

1 1
1 + P

(1 + P) 1 - 1(P)n (1 + P)n

1 1 + P)n 1

1 + P) - 1

Year's purchase (l+p) n-1 (1+p) np C= Amount of Re.1 p.atable Amount of Re.1 table

-(1 +P) n (1 + P)2 (1 + P) n -P X

Changing signs both in denominator and numerator,

The figure of year's purchase based on single rate table can be obtained from Table
No. 4 (Dual rate table) by assuming the redemption of capital at the sainc ratc as
that given for return on capital. Illustration:

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Required p.v. of Re. 1 p.a. @ 7% in 10 years

. The single rate table is useful for threc purposes:

Refer 7% of Table No. 4 and adopt the year's purchase as given in the column where
the rate of redemption has been shown at 7%. It is 7.024.

1) To find out the present value of an annuity, allowing compound interest 2) It

represents capitalized value of an annuity allowing interest (simple interest) on
capital and for its redemption at the same time.

3) It represents the loan amount required to be paid back in equal installments of

Rc. I p.a. allowing interest on the same.

Illustration: Loan amount Yearly installment

The tenants of a building have agrced to return a sum of Rs. 17,205 to the owner of
a building which he has spent on the repairs. It is agreed that the amount should
be returned in twenty annual installments with interest at 6%. Work out the yearly
installment.

Referring to Table No. 4 (redemption column of 6%) loan amount which is required to
be paid back in the installment of Re. 1 p.a. @ 6% in 20 years will amount to Rs.
11,470.

Rs. 11,470: Re. 1

Loan amount Rs. 17,205: 17,205 x 1 11.47

= Rs. 1,500 p.a.

Now let us take the reverse case. The tenants have agreed to give an increment in
the rent of Rs. 1,500 p.a. for twenty years. What amount should the owner spend on
repairs now?

Single rate table represents the present value of an annuity, allowing compound
interest.

Present value of an annuity of Re. 1 p.a. @ 6% for 30 years, =11.47 (Table No. 4)
Present value of annuity of Rs. 1,500

Rs. 1,500 X 11.47. Rs. 17,205

Explanation:

Amount of Re. 1 @ 6% in 20 years will amount to Rs. 3.207. Amount of Re. 1 p.a. @
6% in 20 years will amount to Rs. 36.786.

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Capital present Rs. 3.207

Capital

Amount required to be invested at

Rs. 36.786

Re. 1

36.786 X 1

3.207 = 11.47

Thus an amount of Rs. 11.47 is required to be invested at present such that it

amounts to Rs. 36.786 in 20 years at 6% or the said capital formation of Rs. 36.786
can take place if Re. 1 is invested p.a. at 6%. for 20 years. That is the amount of
Rs. 11.47 represents the present value of Re. 1 p.a. (annuity) at 6% for 20 years.
Illustration:

A charitable Trust desires to purchase a leasehold property with a net income of

Rs. 500 p.a. well secured by means of a pucca building and held for the balance
term of 70 years. What the trust should pay for the same on 6% basis. Working:

P.V. of Re. 1 p.a. @ 6% for 70 years = 16.385 (Table No. 4) P.V. of Rs. 500 p.a. =
500 X 16.385

= Rs. 8,192.50 say Rs. 8,193

Single rate table allows (simple) interest on capital as well as that for its
redemption (sinking fund) at the same rate which can be seen from the analysis
given hereunder:

(a) Interest @ 6% on Rs. 8,193 = Rs. 492.58 (b) Sinking fund for redemption of Rs.
8,193 = 0.001 X 8193 Rs.8.19 Rs. 499.77 Say Rs.500

Illustration:

A plot of land admeasuring about 800 sq.m. has been leased out on a ground rent of
Rs. 7,920 per annum for 99 years, the unexpired period of the lease being 50 years.
The lessee has constructed an r.c.c. framed building over the same at a cost of Rs.
2,20,000 and having the future life of 50 years. Work out the lessor's interest in
the property given that the value of land in the vicinity is about Rs. 110 per
sq.m.

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Working:

The lessor is interested in land which is not a perishable commodity and as such,
his capital investment in land does not depreciate but remains intact after the
expiry of the lease period. In view of the above, the question of sinking fund so
far as the lessor is concerned does not arise.

The lessor will go on receiving a net return of Rs. 7,920 p.a. which is well
sccured by means of a substantial building.

Year's purchase for 50 years @ 6%

Ground rent pa.

Amount of Re. 1 p.a.table Amount of Re. 1 table 290.336 18.420 15.762 (Table No.4)
= Rs. 7,920 Value = 7,920 x 15.762 = Rs. 1,24,835.04

Reversionary value of land: (Subject to no legal restrictions) Value of 880 sq.m.

of land @ Rs. 110 per sq. m. = Rs.96,800 Deferred for 50 years @ 4%Y.P. = 0.1407
(Table No.5) :: Deferred value

= 96800 X 0.1407 = Rs. 13,619.76

Lessor's interest:

a) Capitalised value of ground rent b) Reversionary value of land

= Rs. 1,24,835.04

= Rs. 13,619.76

Rs. 1,38,454.80

Say Rs. 1,38,455

Illustration:

A plot of land has been leased out at a ground rent of Rs. 1,000 p.a. with 10 years
unexpired. The lessee decides to put a pucca building in place and wishes to
surrender the present lease and take a new building lease in place for 50 years.

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Work out the fair rent for the new lease, given that such plot can be leased out at
present at a ground rent of Rs. 1,500 p.a.

What premium the lessee should pay if he desires to renew the lease with the same
rent of. Rs. 1,000? Working:

Lessee:

Profit rent

Rs. 1,500

Rs. 1,000

Rs. 500 p.a.

P.V. of Re. 1 @ 6% for 10 years

= 7.360 (Table No.4) Value that the lessee will surrender

= 500 X 7.360

= Rs. 3,680

This capitalized value will have to be spread over a period of 50 years. P. V. of

Re. 1 @ 6% for 50 years

3,680

Rent -
15.762

= 15.762 (Table No.4)

= Rs. 233.47

Fair rent = Rs. 1,500.00

Rs: 233:47

Rs. 1,266.53 p.a. Say Rs. 1,267 Alternative Working: 1) For first 10 years : P.V.
of Re. 1 @ 6% for 10 years = 7.360

Value = 1,000 X 7.360

= Rs. 7,360

2) Rental for the next 40 years = Rs. 1,500 p. a.

Y.P. for 50 years @ 6% = 15.762

Less : Y.P. for 10 years @ 6% = 7.360

Y.P. for 40 years deferred for 10 years = 8.402

Value Rs. 1,500 X 8.402

= Rs. 12,603

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(+) Rs. 7.360

Rs. 19,963

P.V. of Re. 1 @ 6% for 50 years

15.762 (Table No.4)

: Rent Rs.19,963

15.762

Rs. 1,266.53

Premium:

The profit rental for Rs. 500 p.a. is required to be valued for 40 years deferred
for 10 years.

Y.P. for 40 years deferred for 10 years @ 6% = 8.402 Premium to be paid Rs. 500

Illustration:
= Rs. 4,201

X 8.402

a A co-operative housing society has purchased a plot of land with a tenanted

bungalow fetching an old rent of Rs. 500 p.m. and covers the carpet area of 100
sq.m. The future life of the bungalow is 15 years. The society desires to construct
a multi-storeyed building on the plot and has agrecd to give one flat to the tenant
on ownership basis at the rate of Rs. 600 per sq.m. The tenant has agreed to give
vacant possession of the premises provided its potential value is taken into
consideration in the sale price. The bungalow at present can be sublet at a rent of
Rs. 900 p.m. Work but the potential value of the premises which should be taken
into consideration in the sale price.

Working:

Profit rental

900 – 500

= 400 p.m.

Deduct: Outgoings

@ 45%

180

220 p.m .P.V. of Re. 1 p.a. @ 7% for 15 years = 9.108 (Tablc No.4)

Net profit

P.V. of Re. 1 p.a. @ 7% for 15 years = 2,640 X 9.108

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= = Rs. 24,045.12, Say Rs. 24,000 Sale price of flat Rs. 60,000 Deduct: Potential
value Rs. 24,000 Sale price of the flat for the existing tenant Rs. 36,000

Illustration: Working:

Á plot of land admeasuring about 20,000 sq.m. has been let out as accommodation
land at a ground rent of Rs. 2,000 p.a. The said plot has been reserved for the
purpose of shifting the present race ca which is situated in a non-conforming zone.
It will take 10 years for shifting the race course when it fetch a ground rent of
Rs. 10,000 p.a What is the present value of the plot.

Since the present ground rent of Rs. 2,000 p.a. cannot be said to be secured and
hence it will be capitalized @ 7% and the same will be maintained for a period of
10 years and thereafter the ground rent is likely to be secured.

(P.V. of Re. 1 p.a. @ 7% for 10 years

= 7.024 (Table No.4)

Value 2,000 X 7.024

= Rs. 14,048

(ii) P.V. of Re. 1 p.a. in

Perpetuity @ 6 - 1/2% 15.385

Deduct: P.V.of Re.

7.189 p.a.@6 - 1/2% for 10 years

P.V.or Re. 1 @ 6 – 1/2 % in

Perpetuily deferred for 10 years 8.196

:: Value

10000 X 8.196

Rs. 81,960

Value of plot

= 81,960 + Rs. 14,048

= Rs. 96,008

Illustration:

The Government has given a property consisting of land and building to a public
school on a nominal rent of Rs. 1 p.a. with a condition that the school authorities
must find alternative accommodation within a period of 10 years (10 year's Icase)

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and after that the whole property should be handed over to the Government in vacant
possession. Work out the market value of the property given its full rental value
at Rs. 3,500 p.a.

Working:

Neglecting Re. 1 p.a., income after 10 years = Rs. 3,500 p.a. Value of the property
as if the income commence at present

3500 X 100 7 = Rs. 50,000

P.V. of Re 1 @ 7 % Payable after 10 years 0.508 (table no. 5) Present value =

= 5000 x 0.508 = Rs. 25,400

Note:In case of deferred income, it is advisable to use the method given above in
preference to the method wherein deferred year's purchase is obtained by
subtracting from the car's purchase of the complete period (including non-income
period), the year's purchase of non-income period.

Illustration:

A plot of land admeasuring 1,000 sq.m. has been Icased out with 15 years unexpired
at a ground rent of Rs. 600 p.a. The lessec has sub-leased the saine at an improved
ground rent of Rs. 1,200 p.a. The value of the vacant plot of land in the locality
is about Rs. 80 per sq.mt. The lessee wishes to develop the plot and hence, wants
to surrender the present lease and take a building lease for 99 years. He has
agreed to pay a sum of Rs. 10,000 as a premium to the sub-lessee for the vacant
possession of the plot. What ground rent should the lessee pay to the freeholder? a

Working: Value of plot 1000 x 80 = Rs. 80,000 Deduct: Compensation to be paid to

the sub-lessee

Rs.70,000 Fair ground rent for the open plot @ 5% of Rs. 70,000

Rs. 10,000

Rs. 3,500 p.m. Value of the existing lease surrendered :

Profit Rental

Rs. 1,200

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Rs. 600

Rs. 600

P.V. of Re. 1 @ 6% in 5 years = : 9.712 (Table No. 4) : Value = 600 X 9.712

= Rs. 5,827.20 Say Rs. 5,827 This is required to be spread over a period of 99
years. Y.P.@ 6% for 99 years = 16.615 (Table No. 4)

Rent = 5827

16.15

= Rs. 350.71 p.a.

The lessee will pay the ground rent of Rs. 3,5003

Rs. 31,49.29 or Rs. 3,149 p.a.

YEAR'S PURCHASE IN PERPETUITY

Note:
Rs. 350.71

Present value of Re. 1 p.a. in perpetuity is obtained by dividing 100 by the rate
of interest.

P.V. of Re. 1 @ 6% in perpetuity = 100 = 16.667 P.V. of Re. 1 @ 5% in perpetuity =

100 = 20 Illustration:

Work out the present value of a well-secured ground rent of Rs. 1,000 p.a, at 5% in
perpetuity. Working: Year's purchase in perpetuity = 100 = 20

Present value of Rs. 1,000 p.a. in perpetuity

= Rs. 1,000 x 20

= Rs. 20,000

This table has not been given in the book as the same can be worked out easily.

Illustration:

A person desires to sell his well-built property having the net rent of Rs. 15,000
p.a. in perpetuity. One of the conditions of the sale is that the purchaser has to
pay a sum of Rs. 20,000 once in every 10 years to "Nehru Foundations”. What is the
value of the property based on the rate of 7-1/2%?

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Working:

Net income = Rs. 15,000 p.u.

Year's purchase Capital value

100

13.333 :

Rs. 15,000 X 13.333

Rs. 1,99,995

Out of the made for the

above value necessary deductions will have to be 10 years in perpetuity.

If amount of Re.I is invested at 7-1/2% compound interest it will accumulate to Rs.
2.061 in ten years (Table No. 1)

From the said sum of Rs. 2.061 take out the original sun of Re. 1 which will now be
utilized for the next ten years. Thus within 10 years the profit obtained in Rs.
1.061.

Profit Profit

Rs. 1.061 : Re. 1

Amount : Re. 1 1 X 1 1.061 = Rs. 0.94

It can be seen from the above that at present a sum of Re. 0.94 is required to be
invested so as to get a profit of Re. 1 after 10 years. If a profit of Rs, 20,000
is required after 10 the present sum will be years,

Rs. 20,000 X 0.94 =

Value of the property Rs.1,99,995

Rs. 18,800.

(-) Rs. 18,800

Rs. 1,81,195

Dual Rate Table

This table allows simple interest on capital invested and sinking fund for its
redemption at different rates of interest.

If Re. 1 is invested at p% then first installment at the end of first year will
consist of (p + s) where 's' is the allowance for sinking fund.

Installment Installment P.V. Rs. (p + s) : Re. 1 Re. 1 1 (P + s)

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Present value of Re. 1 p.a. will be 1

(P +S)

Where

р = interest on Re. 1,

$ = sinking fund to replace Re. 1 in specified number of years.

Illustration:
What is the year's purchase for 10 years @ 6%, the rate of sinking fund required is
3%?

Working:

1 Year's purchase (P + S)

P = 0.6

P =Sinking fund @ 3% for 10 years = 0.0872 (Table No. 3)

.. Y.P. 0.06 + 0.0872

= 6.792 (Table No. 4)

1 0.1472

Illustration:

A client desires to buy an r.c.c. framed building consisting of ground and two
upper floors fa a monthly rent of Rs. 1,500. The area of plot is 800 sq.m. and the
future life of the building is Advise the purchase price to the prospective client
who desires interest on capital @ 8% and reden capital @ 4% given that the total
outgoings from the rent arc to the tune of 43% and neglect rever valuc of land.

Working: Gross rent per year Rs. 1,500 x 12 Rs. 18,000 Deduct: Outgoings 43% Rs.
7,740

Rs. 10,260

Year's purchase @ 8% and redemption of capital @ 4% for the future life of 60 years
11.876 (Table No. 4).

Capital value = Net return x Year's purchase

Rs. 10,260 x 11.876 Rs. 1,21,847.76 Say 1,21,848

Illustration:

43

Higinsuring (Asaitany

Work out the present value of a property given the following data: a) Area of land
1,000 sq.m.

lease. c) Ground rent Rs. 3,000 p.a.

b) Tenure 999 year's

d) Rent realized from the property Rs. 30,000 p.a. e) Municipal taxes 1) Municipal
rateable value Rs. 26,170

Rs. 4,285.50 per six months.

g) Future life of the building h) Insurance Rs. 300 p.a.

50 years.

i) 4,000 cu.m.

Cubic contents

i) R.C.C. framed structure with ordinary finishings k) Year's purchase for 50 years
Allowing interest on capital @ 7% and redemption

of capital @ 4% 13.063 1) Sinking fund on 4% basis for the future life of 50 years

Working:

1) In the above illustration, municipal taxes are given and hence municipal ratable
value is a redundant data.

2) Since the year's purchase based on dual rate is given, separate calculation for
sinking fund is not required.

3) Reversionary value of land is not considered as the problem does not give P.V.
Re, 1 payable at the end of 50 years.

Instead reversionary value of land, income will be capitalized at 7% in perpetuity

rather than adopting the figure of ycar's purchase given in the problem. Working:

Gross rent Rs. 30,000

Deduct:

a) Municipal taxes.p.a.

8,571 b) Repairs @ 10% of the gross rent of Rs. 30,000 c) Management and collection
charges @ 6% of Rs. 30,000 d) Insurance

300 e) Ground rent

Rs. 3,000 Rs. 1,800

3,000

Rs.

Rs. 16,671 (-) Rs. 16,671

Rs.

Rs.

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Net return 13,329

Capitalising rent return at 7% in perpetuity, YP. -

Capitalised value RS. 13,329 y 14.286

= Rs. 1,90,418

Illustration:

An owner has provided an electric litt for his building recently at a cost of Rs.
1,50,000. The tenants have agreed to give un increase in the rent. Work out the net
increase allowing interest on capital & 0% and redemption of capital @ 5%.

Working:

14 286

Net increase in rent is excluding operation and maintenance charges for the lifi,
Life of the lift adopted at 30 years,

P.V. of Re. 1 p.a, allowing interest on capital @ 9% and redemption @ 5% for 30

years 9.519 (Table No. 4)

Year's purchase 1,50,000 A' X 9.519

Value Annuity .

= 1,50,000

9.519

Rs. 15,757.96 or Rs. 1,313.16 p.in.

Rs.

Illustration:

A building substantially built is owner-occupied and the rent as worked out from
the rateable value of the property comes to Rs. 3,000 p.a. The owner now desires to
let out the whole building to a bank on a lease for 15 years. The bank is prepared
to pay a rent of Rs. 15,000 provided renovation work amounting to Rs. 50,000 is
carried out by the owner. The owner desires that the renovation should be carried
out by the bank and is prepared to accept a low rent. What icnt should the bank
offer based on 9% rate of interest.

Working :

The Amount of Rs. 50,000 is required to be spread over a period of 15 years with
interest on capital @ 9% and redemption @ 5%.

P. V. of Re. 1 p.a. @ 9% and 5% for 15 years = 7.334 (Table No. 4). 50,000 'A' X
7.334 -

Value = Annuity Year's purchase

A = Rs. 6,817.56 Say Rs. 6,817

Pyn
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The bank can offer a rent of Rs. 15,000 (-) Rs. 6,817 Rs. 8,183 =

per annum.

Illustration: An terrace

open of an existing building (existing building of ground and two upper floors) has
been given on leasse for 35 years on a rent of Rs. 2,000 p.m. The lessee has
constructed three floors over the said terrace of the building at a cost of Rs. 4,
00,000). After the expiry of the lease period, the additional floors will revert to
the lessor. The present market value of the existing building of ground and two
upper floors only is Rs. 2, 00,000 without the terrace rent of Rs. 2,000 p.m. At
what net rent should the lessee let out the three floors? What is the value of the
lessor's inierest in the property?

Working:

Year's purchase @, 7% and 4% for 35 years = 11.965 (Table No. 4)

Rent =

4,00,000

11.965

= Rs. 33,430.84 p.a. or Rs. 2,785.90 p. m. Say Rs. 2,786 p.m. Add: 1) Market value
of the existing building Rs. 2,00,000 2) Enjoyment of rent of Rs. 2,000/- p.m. for
35 years. P.V.of Re. 1 p.a. @ 6% for 35 years 1.498 (Table No. 4)

The terrace rent of Rs. 2,000 p.m. making the total net rent to Rs. 4,786 p.m.
Lessor's interest:

Value 24,000 X 14.498 -

Rs. 3,47,952 35 P.V. of Re. 1 @ 6% payable after 35 years

0.1301 (Table No. 5) Value 40,00,000 X 0.1301

Rs. 3,47,952

3) Present value of three floors of Rs. 4, 00,000 which will be receivable after
years.

Rs. 52,040

Rs.52,040

Rs.5,99,992

Deferred Income

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a specified term

cases: Defered income means an income which will not commence unless has passed. A
value usually meets with the following

Forta

a 1) Deferred income receivable in perpetuity after a certain number of years, 2)

Deferred income receivable for a specified period after a certain number of years.

Case No. 1 - Deferred Income in Perpetuity Year's purchase for deferred income
=Year's purchase for perpetuity - Year's purchase for the non-income period.
Illustration: Working:

The year's purchase in this case can be worked out by any of the following two
methods.

Method No. 1 - Deferred Income in Perpetuity

What is the present value of an income of Rs. 1,500 p.a. in perpetuity at 5% which
will commence after 10 years.

Year's purchase @ 5% in perpetuity

100

= 20

Year's purchase @ 5% for 10 years (non-income period) = 7.722 (Table No.4) Year's
purchase in perpetuity deferred for 10 years.

= 20

7.722

Capital value

= 12.278

= Income p.a. x Y.P.

Rs. 1,500 X 12.278

Method No. 2:

Rs. 18,417

1) Work out the capital value as if the non-income period has passed. 2) Work out
the present worth of the said capital value.

Referring to the above illustration,

Capital value after 10 years Rs.1,500 X 100 5

Rs. 30,000 (value which is to be paid after 10 years.) Where 100 is the year's
purchase in perpetuity.
1

En

47

P.V. of Re. 1 receivable after 10 years @ 5%

0.6139 (Table No.5) .P.V. of Rs. 30,000

Rs. 30,000 X 0.6139

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= Rs. 18,417

Deferred income receivable for a specified term after nonincome period has passed:
Year's purchase in this case can be obtained by any of the following two methods.

Case No. 2

Method No. 1:

1. Year's purchasc for defcrred income

Year's purchase of the total period of investment (-) Y.P. for the non-income
period.

This method of deducting one Y.P. from another should not be used when the year's
purchase is based on dual rate table.

Illustration: Working: Year's purchase @ 5% for 40 years (Table No. 4) 17.159

What is the present value of an income of Rs. 1,500 p.a. receivable for a period of
30 years and the income will commence after 10 years the rate of interest expected
is 5%.

Year's purchase @ 5% for 10 years (Table No. 4) = 7.772

Year's purchase for 40 years, deferred for 10 years @ 5% = 9.437 Present value =
Rs. 1,500 X 9.437

= Rs. 14,155.50

Method No. 2:

1. Work out the capital value as if the non-income period has passed. 2. Work out
the present worth of the said capital value. Referring to the above example,
capital value Rs. 23,058 (to be paid after 10 years) P.V. of Re. 1 receivable after
10 years @ 5% = 0.6139 (Table No. 5)

Y.P. for 30 years @ 5% x income p.a.

15.372 x Rs. 1,500 (Table No. 4)

P.V. of Rs. 23,058 x 0.6139

- Rs. 14,155.31

48

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Illustration:

A plot of land has been leased out by the Government for housing of displaced
persons on a rising ground rent of Rs. 3,000 p.a. for the first ten years, Rs.
6,000 for the next ten years, Rs. 12,000 p.a. for the next ten years thereafter and
Rs. 24,000 p.m. which will be maintained in perpetuity. Work out the value of plot
on p.a. 6% basis.

Working:

Step 1 : P.V. of Re. 1p.a. @ 6% for 10 years = 7.360 ( Value Rs. 3,000 X 7.360

Table No. 4)

Rs. 22,080

Step 2:

Rs. 22,080

P.V. of Re. 1 @ 6% for 20 years - = Rs. 11.47

Deduct:

P.V. of Re. 1p.a. @ 6% for 10 years

P.V. of Re. 1p.a. for 20 years deferred for 10 years. Value

Rs. 7.360

Rs. 4.110

= Rs. 6,000 X 4.110 R = Rs. 24,660 Rs. 24,660

Step 3: P.V. of Re. 1/- p.a. @ 6% for 20 years 11.470

= P.V. of Re. 1/p.a. @ 6% for 30 years = 13.765 Deduct:

P.V. of Re. 1 p.a. @ 6% for 30 years deferred for 20 years Value 2.295

= 2.295

Rs. 12,000 X 2.295 = Rs. 27,5401 Rs. 27,540

Incom

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Step 4:

P.V. of Re. 1 p.a @ 6% in perpetuity

16.667 (Table No. 4) 13.765

Deduct:

P.V. of Rc. 1 p.a. @ 6% for 30 years

19.765

P.V. of Re. 1 p.a. @ 6% in perpetuity deferred for 30 years Value 2,902

=Rs: 24,000 X 2.902

Total Value:

Rs. 69,010

Step 1

Rs. 69,040

Step 2

Step 3 Step 4

Rs. 22,080 Rs. 24,660 Rs. 27,540 Rs. 69,648

This table shows the amount which when invested at compound interest will
accumulate to Re. 1 after a specified period. Amount of Re. 1 invested at 'p' rate
of interest will accumulate to Rs. (1 + p) n after 'n' years.

Accumulate amount Present value

Rs.(1 + p)n

Accumulate amount Re. 1: 1 x 1 (1 + p)n 1 . 1 table

Re. 1

Amount of Re Thus it can be seen that this table is the reciprocal of amount of Re.
1 table.

This table is useful in finding out the present worth of a sum receivable in future
and for ascertaining the deferred value of land.

Illustration: What is the present value of Re. 1 receivable after 10 years at 4%

Rs. 1, 43,928

TABLE NO.5

Present value of Re. 1 receivable at the end of given term

:

VO

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Working:

P.V. of Re. 1 after 10 years 4%

1 Amount of Re. 1 in 10 years @ 4% 1 1.480 (Table No.1) 0.6756 (Table No.5)

Illustration:

An open plot of land admeasuring about 2,000 sq.m. is being used as a playground by
a school. The school is required to be shifted from the present position to a new
site and hence school authorities require the necessary finance for the
construction of their new building. In view of the above it is proposed to sell the
said open plot of land at present with a condition that its possession will be
given after three years.

The lands in the vicinity have very good building potentialities and have been sold
@ Rs. 100 per sq.m. Work out the present value of the plot allowing interest on
capital @ 6%.

Working:

Present value of Re, 1 at 6% payable after 3 years = 0.8369 Value of the plot after
3 years

2000 X Rs. 100

Rs. 2,00,000

Present value

= 2000 X 0.8369 Rs. 1,67,920

The value of the plot after three years has been based on the present rate of land
as it is very difficult to forecast the rate of land in future. It is likely that
the value may go up or go down and that there is no method by which the deferred
value of land can be worked out except that based on the prevailing rate of land.

Illustration:

A plot of land admeasuring about 800 sq.m. does not have any means of access to the
same at present. However it will face an 18 metre wide road as shown on the
Development Plan as and when completed which will take about 10 years. Plots
abutting on roads in the neighbourhood have been sold at Rs. 50 per sq.m. recently.

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Assuming that no betterment charges are required to be paid, calculate the value of
land based on 8% rate of interest.

Working:

Value of the plot if it were to face main road at present

= 800 X Rs. 50 Rs. 40,000

As construction of road will take 10 years and hence the said sum of Rs. 40,000
will have to be deferred for that period,

P.V. of Re. 1 payable after 10 years @ 8% = 0.463 (Table No. 5). Present value of
Rs. 40,000

40,000 X 0.463 Rs. 18,520

Illustration: Work out the market value of a property given the following data: a)
(a) Area of land 800 sq.mt.

b) Tenure Freehold

p.a. d) Net rateable value of the property Rs. 21,000 e) Gross rent Rs. 2,000

c) N.A. assessment Rs. 200

p.m. f) Water charges Rs. 650 p.a.

g) Municipal taxes 32.75% of value

the net rateable h) Future life of the building Rs. 2,50,000 60 years.

i) Cost of construction

p.a. k) Rs. 150 per sq.m.

i) Insurance Rs. 300

Value of land

1 Year's purchase for 60 years

Allowing interest on capital @

7% and redemption of capital @ 4% m) P.V. of Rc. payable at the end of 60 years @

5%

13.477 0.0535

Working:

Gross rent

Rs. 24,000.00
Deduct:

a) Municipal taxcs @ 34.75% of n.r. v. of Rs. 21,000

Rs. 6,877.50

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Rs. 2,400.00 Rs. 1,440.00

b) Repairs @ 10% of Rs. 24,000 c) Management and collection charges @ 6% Rs. 24,000
d) Insurance e) N.A. assessment

11,217.50

Rs. 300.00 Rs. 200.00

Net return per year

Rs.

Capitalizing net return on 7% and 4% basis for a life of 60 years, the year's
purchase = 13.471

Value

Rs. 12,782.50

= Rs. 12,782.50 X 13.477 Rs.1,72,269.75 Reversionary value of land (subject to no

legal restrictions): Value of land at present 800 X Rs. 150 = Rs. 1,20,000 P.V. of
Re. 1 payable after 60 years @ 5% = 0.0535 Present value of Rs. 1,20,000 = 1.20,000
X 0.0535

= Rs. 6,420 :: Market value of the property will be : (a) Rental value

Rs. 1,72,269.75 (b) Reversionary value of land Rs. 6,420.00

= Rs. 1,78,689.75

Say Rs. 1,78,690

Note:

It is assumed that the rent charged does not include water charges which are
collected by me owner separately from the tenants in proportion to their rents.

TABLE NO.6

Depreciation based on Sinking Fund Method

It consists in working out the capitalized value of sinking fund for the past
period. It is presurned that an owner will invest a portion of rent in the form of
sinking fund every year in some securities at compound interest and as such he will
be in possession of part capital accumulated during the past age of the building
and

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value of the building is required to be reduced by the said part capital which is
nothing but the value of depreciation.

hence the Illustration: Working:

Step No. 1: Work out sinking fund at given rate of interest for the life of a
building. Step No. 2: Work out the amount which will be accumulated on account of
investment of annual sinking fund at given rate of interest for the specified age
of building.

Work out the depreciation for a building having a life of 60 years and age of 30
years @ 4%.

1. S.F. @ 4% for 60 years

0.0042 (Table No. 3) 2. Amount of Re. 1 p.a. in 30 years @ 4% Investment Investment

Rs.

Re. 1

Re. 0.0042

Illustration:

Amounts to

Rs. 56.085

56.085 X 0.0042 = 0.2355 or 23.55%

An owner-occupied building is required to be valued for the purpose of Wealth-tax

on land and building basis. The value of land is Rs. 50,000 and the cubic contents
of the building are 2,500 cu.m The building is 20 years old and has got a total
life of 60 years. The present cost of construction is Rs. 80 cum work out the value
of the property based on 5% depreciation rate.

Working:

56.085 (Table No. 2)

S.F. on 5% basis for the life of 60 years 0.00283 Amount of Re. 1 p.a. in 20 years
@ 5% = Rs. 33.066 (Table No. 2) Depreciation rate = Rs. 33.066 X 0.00283 =

= Re. 0.0936 or 9.36%

Cost of building as if new having

2500 cu.m. @ Rs. 80 per cu.m. Rs. 2,00,000 Deduct: Depreciation @ 5% for the
life of 60 years and age of 20 years i.e. at 9.36% = Rs. 18,720 Rs. 1,81,280
Depreciated cost of building Value of Property: 1. Value of land Rs. 50,000

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2. Depreciated cost of the building

Rs. 2,31,280 Depreciation

= Annual S.F. for the complete life of the building X Amount of Re. 1 p.a. for the
age passed

Now annual S.F.

Rs. 1,81,280

Amount of Re.1 p.a.table

ILIT

: Depreciation =

Amount of Re. I p.a. for the age passed. Amount of Re.l pa. for the full life of
the building.