» Real estate, personal estate 9.2 Objects of valuation 9.8 Mortgage, free hold property, Lease-hold properly 9.4 Property income, Gross income, Net income, outgoings 9.8 Depriciation and obsolescence 9.6 Different forms of value 9.7 Miscellaneous topics 9.8 Valuation tables and their uses 9.9 Valuation methods for property and land 9.10 Types of rent er. et a ce 9.11 Procedure of fixing standard rent ies tT) + Exercise 1 An : Pe al 015 50 9.1 Define terms : Cost, price, value, Real Estate and Person: «| Estate : (May 2016, 2017) Re d tual amount incurred in producing a The term cost is used to indicate the actual amd after accounting i be known i construction and can unt aera planning stage till the constuction is All day-to-day expenditure from the very com, : i d ci charges represented directly in the commodity produces \¢ expenditures or ¢l “called the prime costs. x management, services, salaries, Other expenditures..or-©® tion, etc. represented # “alled the supplementary cost ‘directly in the production of ‘the commodity are indirec'ea Engineering Economies, Estimation and costing total cost = Prime cost + supplementary cost valde’? (May 2016, Nov. 2017, 203, _/ Value means its worth or utility. Value varies. from time to time and depends largely on the supply of ¢j Particular type of property and the extent of the demand for it. The cost oft construction of a building may have no relation to the value of the same if sold the open market. The value of the property within a short time may be more like double th, the cost of construction when there are more buyers for that type of property a vice-versa. The value depends mainly on ~ It's utility ~ Scarcity The quantity of one commodity that will exchange for quantity of anothi commodity is called the price of this latter commodity and vice-versa For example, The value of a motor car may be ex] pressed in terms of so many cycles or so many kg of wheat, etc, This system is known as barter system. In modern days, however, the relative valu expressed in terms of money. yo + Price es of various commodities are Produce a commodity, the manufacturer toh above the cost of commodity. The price of a commodity is determined by the supply and demand condition: market for that particular commodity and or below its cost of Production. 1S prevailing in the Such, a commodity may be sold above 2023.10, The actual amount Meurred in producing a commodity is calieg its cost. b, It has relation with past. g. It is a constant amount, For example, } to his liking at a cost of Rs. 4 lacs, But, property which has little value to the others of Rs. 2.50 lacs. The owner was about to sell gowth of population starts. So due to dem: and he sells it at a price of Rs. 6.0 lacs. So, 250 lacs to 6.0 lacs but the cost remains th depends on demand and supply where cost i Difference between Price and value : | Price = cost + profit Place, is called real ¢ Property, state 0} Value means worth or utility of a commodity, It has relation with future. Value depends on supply and demand, just after that he wants to sell the utility and he gets a maximum offer 1 his property, but just at the time, a plan is sanctioned to develop an airport adjoining to the area and subsequent and the out-house becomes valuable the value of the property varies from same Rs. 4.0 lacs. Therefore, value is a constant amount. Value means work or utility of a commodity. A value is an estimate of what the price ought to be. from one place to another place is called personal estate or personal property.ea Engineering Economies, Estimation and cov 2. Land, buildings, etc. are real estate.| 2. All other property except land buildings are personal estate, 3. Real estate is also known as real| 3. Personal estate is also known personal property or personality chattle. property or reality. 4. Valuation of real estate is difficult. | 4. Valuation of personal estate is ea: 5. All the matter fixed to the earth is called land. 5. All the matter removed from ti earth becomes personal estate. 6. e.g. foundation, buildings, trees etc.| 6. e.g. construction materials, timber, 1 and oil explored from earth Similarly, coal and oil, till inside the ee . called personal estate. earth, are called real estate. 7. After death of the owner of the real estate, the property is given to his heirs, 7. After death of the owner of th personal estate his personal representative takes the possessi of the property. 8. Real estate is the subject of tenure. Bi * Necessary conditions for value 8. Personal estate is the subject absolute ownarship. For a commodity to have value should possess the following conditions : () ‘Transferability : The attribute necessary for a commodity to possess of getting itself exchanged is termed transferability, The lands and buildings are not portable, but they can be transferred. (i) Marketability : The commodity should be such that it can be eas marketed, i.e. it can be easily sell or buy in the open market. (iii) Utility : The attribute or characteristic of usefulness or the quality power of satisfying the wants or needs is termed as utility. (iv) Seareity : The commodity must be s. demand in the market. + What is valuation ? (tev. 2016, May 201 ‘earce or limited in quantity and Property such as a building, a factory, other engineering structures, land, etc. PeNTO2023.10.23 17:59[S66 Engineering Economics, Estimation and costing 2) Administrative approval 3. To investigate feasibility 4. To get loan from bank 5. For insurance purpose 6. For deciding taxes % To decide rent of a building 9.2 Objects/Purposes of valuation : ee (June 2014, May 2015, 2017, Nov. 2017, 2018) The main purposes of valuation are as follows : 1, Buying or selling property : seme Geisc ude © eree(l age eet) PO'O When it is required to buy or sell a property, its valuation is required. 2. Security of loans or mortgage : When loans are taken against the security of the property, its valuation is required. It is also referred to as valuation for mortgage purposes. wee (aerse PEN) ONT Stic SKA 1S yisot wad] 3. Rent fixation : ere fererfes In order to determine the rent of a property valuation is required, Rent is usually fixed on certain percentage of the amount of valuation (5% to 10% of the valuation) Pus t33) Sear Valtion oreciene df 4. Insurance : Groce Ceowmement value wicrcie) fag, / For the purpose of taking out an insurance policy of the property, the owner desires to know the replacement value of the property. In this case, the value of land is excluded or omitted. 5. Taxation : 50 4 ©) =n ox ara To assess the tax of a property, its valuation is required. Taxes may be municipal tax, property tax, wealth tax, etc, and all the taxes are fixed on the valuation of the property. 6. Compulsory acquisition Sometimes, a property is acquired by law for so case, the injured party is to be paidthe amour overt ee nt of compensation valuation of the Betterment charges ; tional tax, known as t adi a ‘he betterment charges. It becomes, therefore necessary for the owner of the property to know the value o f his ) completion of town planning scheme Property before and after 20 8, Speculation : When a purchase is intended for sale of the property and make some profit, a short period valuation is necessary for that purpose and this is known as speculative value. Generally speculative value is lesser than the market value. 9. Court fees : tion is When a case has to be filed with respect to a real estate, it becomes necessary fl to affix stamp of suitable amount. This amount is worked out after arriving at the 7a : 1 value of the property under dispute. iis | 10. Gift tax of the When a property is gifted, valuation of the gifted property is necessary to pay Ti ese igikedtiesent by the person whom the propane. Bes been gifted. 1, Balance sheet : . ‘ation of its premises for the purpose of r, Sometimes, a company requires valu uit showing them in the balance sheet: : , May 2018) fois between Estimation and valuation : (Nov. 2017, 2018, May 2018) ference between Est! ‘ne, S ‘Valuation Valuation is the art of estimating or determining the fair price or yalue of a property such puilding, a factory, other engineering structures, land, ete. quantities and cost © of a building to know its P Cost is called estimation. Sage gaeeck Cer I FOR ON as! ae pees2. Estimation is done before starting the construction. 3. At the time of estimation the property is not in front of the eyes of an estimator, therefore, accuracy BO wile is less, ©) 4. Purposes of estimation are + Preliminary study of the project + Administrative approval ari investigate feasibility + To get loan from bank, etc 5. Factors affecting estimation are, + Type of construction + Year of construction + Location, etc. Engineering Economics, Estimation and costi ee Vatuation is done after completi of construction or for land only, At the time of valuation, ¢ property is in front of the eyes valuer, therefore, accuracy is m Purposes of valuation are Se Giving on selling property. + Security of loans + Rent fixation . Insurance, etc. Factors affecting valuation are, + Demand and supply + Development in public sch Comme! AEA + Rise in population + Bank interest, weed + Construction cost, etc. * Characteristics of a good valuer : A valuer is an expert who can workout the market value of a property analysis and instances of sales. A good valuer is an engineer on scientific architect. The valuer who has been properly trained in his subject can play a great in arriving at the reasonable values of the properties. A good valuer must possess sound knowledge of the following subjects. Estimating and costing 2. Planning and designing 3. Surveying and levelling 4. Building bye-laws of the local bodies AWALaw of contracts Land acquisition 7, Experience in Construction Work; \ 8, Town planning act id le 9. Arbitration 10, Economic geography 11. Sociology 12, Commercial mathematics 13. Investment principles 14, Insurance 15. Money market and rate of interest 16. Taxation of government 17. Report writing 9.3 Mortgage, Free hold property, Leasehold property : UI] Mortgage : ‘The owner of a property can borrow money against the security of his property. @ | Such advancement of money against any form of security is called as mortgage. iA The transacti the security and the conditions of loan are entered in a sactions, y ctcument known as mortgage deed. i ortgagor. i The person who takes loans is known as ™ is known as Mortgagee. The person who advances the loan is kn iin ie ; ther with interest the mortgagor got eee rigagee, and this is known as Equity of When the loan is fully repa 2 to free his property from the ™ “nation i title deeds of property with the depositing the title ; Deng te money is advanced YF ee joan and interest, it is known as the tau as a security for the repaymen! | sii oan by the mortgagor, the mortgagee can "© case of faiture of repayment ° ¢ Tass Ee L[Bo Engineering Economics, Estimation and cos 'd sell it to recover the amount of loan, if any is paid to the mortgagor. take over possession of the property an interest and other expenses. The surplus, n connection with mortgage : ‘The following points should be noted i 1. Amount of loaa : the property shall be considered Not more than 70% of the value of advancing the amount of loan. Net rent from the property should be at least equal to or favourably required to pay on the loan amount, than the interest that a mortgagor will be 2. Insurance : It is desirable to have an insurance of the property in the name of both ~ mortgagor and the mortgagee. The insurance policy is kept with the mortgagee the mortgagor is required to pay the premium regularly. 3. Period of loan : The period of repayment of loan is generally more and hence, the pro} must stand as security for the loan over a longer period of time. The valuation the property is so framed that it serves as a sound lendable basis, considering property will depreciate and more repairs may crop up if the mortgagor negle maintain the property. 4. Leasehold property : It is possible to have a mortgage deed for a leasehold property. But, in cases, care should be taken to revalue the property periodically so as to see the amount of the remaining loan does not exceed the value of the property. 5. Third party guarantee : Normally, the mortgagee is more interested in the recovery of his loan raf than the possession of the mortgagor's property. Hence, sometimes a pe! guarantee from a reputable party is included in the mortgage deed so that in of emergency, the mortgagee may request such party to repay the loan advan¢ the mortgagor. [2] Free hold property and lease hold property : 1. Free hold property : A free hold property means that the owner is in absolute possession 2023.10.23subject to He may ~ Sell the property ~ divide it = develop it ~ Grant it on lease, at his Sweet wi i 2, Lease hold property touse his free hold property which is Known as giving property on lease, and such property is called leasehold property. ‘ ‘The person who takes lease is known as lesee or leaseholder. Ant pt The owner of the property who grants lease is known as lessor. The duration of lease may be for quite a short period, yearly, or 3 years. But cccupation leases for terms such as 15, 21, 25 or 50 years are common in practice. When the lease is granted for a period of 99 years, it is known as long term lease ‘and when it is for 999 years it is said to be perpetuity or for endless duration. At the expiry of the lease the lessor gets back absolute possession of the fone! (5 * Difference between Freehold property and Leasehold property. re (May 2012, 2016, 2017) — La i jute owner off 1. A leaseholder possesses the » A freeholder is absolu' occupational right for a specific his property. period of duration and after that has no longer any right for that property. ‘A leaseholder requires to pay a periodic payment regularly to hold the possession of the property. 3, A leaseholder can not sell the property and he can not lease the property. AAI OyEngineering Economics, Estimation and cos 72 4. A leaseholder can not develop ther 4. The property can be developed property without consent of ¢ within the limits of municipal laws. PFaforir Serest’ owner of the property. 5, This is an ownership for possessi against payment and terminate ag soon as the lease period is over, Successors of the leaseholder have no right to the property. 5. This is a permanent property of the freeholder and his successors. 6. A freeholder's interest is the lease] 6, His interest in the property may rent and to regain the possession have some value in that it confers over his property after lease period a right on him to occupy the is over, because as per Rent property and may enable him to Control Act regain of possession claim a new lease or to continue has become difficult. his possession at the end of his term under the legislation. [3] Restrictions for free-hold property : ‘The statement that the owner of a free hold property can do anything with property only means that he can sell or develop or create less rent without consent of other private persons. However, the powers of the free holder are mai restricted by the following two factors. a. Law of land b. Right of others 4. Law of land : While developing or carrying out modifications in the hold property, the owner has to respect the prevailing planning laws of the Various town planning acts, laws or restrictions have come into existence and freeholder is required to obtain the permission from the concern authority he starts to develop or modify his property. Also, in case of emergency or by the application of some acts of parli the government may force the freeholder to sell or to let his land or property) local authorities for some public purposes. In India, the property can be under the provisions of "The Land Acquisition Act, 1894." b. Right of others : The free holder should develop or modify hisg interfering with the natural ;j, 7 ights of t! Pare rights of owners of neighbourin ae ‘8 Properties may be in the form of use yn well, common passage ; Se. entry of sufficient light and air, etc. A pestrictions for lease-hold property ; 1, A leaseholder has to pay rent to the freeholder regularly. of neighbouring properties. 2 if the land given on lease is for residential purpose, a leaseholder can not use it for other purposes like commercial, industrial, etc. 3. He must use the leased property as a prudent man would use his own property. 4. He can not do any act which causes a permanent injury to the property. 5. He can not make any modifications in the property without the permission of the freeholder. 2 6. He has to maintain the property in a good condition at his own cost. a 7. He has to surrender the property to the freeholder as soon as the lease period is cover. Do 8. Successors of the leaseholder have no right to the property. mm | 1) Types of Lease : The different types of lease are : 1. Building lease 2, Occupation lease oF 3. Sublease i Dy Site tense a” 5. Perpetual lease 4 Building lease : ota open plot leases out his pot t0 somebody ta this case the owner of a free DOT, cround rent by, the lease holder. expenses and "construct a building on payment maintains it at his own building and mre to the lease 2023.10.23 17:56Engineering Economics, Estimation and costh [4 invest sufficient money in constructing thi period for 99 to 999 years. e building, such lease is granted for | [At the end of the lease period, the lessor has got the right on his land toget with the structure on the land. 2. Occupation lease In this case the building is built by the owner (freeholder) and the built property is given lease for the purpose of occupation for a specified period payment of certain amount of annual rent. The occupation lease may be residential, office, factory, shop. etc. ‘The lease period will depend on the purpose for which the building has constructed. If for a factory, the lease period should be 10 to 30 years, for ot lease it may be less. In occupation lease the maintenance of the building, is ust done by the leaseholder which may be provided in the lease deed. 3. Sub-lease : A leaseholder may grant sub lease of his leasehold property to other pe subject to the terms and conditions in the original lease. In this case the origi lease holder is named as “assignment of lease" and the sub-lease holder is as "sub-lease." It should be noted that the sub lease can be granted only for a period wh is less than the original lease period. Persons, this is called life lease. The lease comes to an end on the death of person or persons. 5. Perpetual lea: When the lease of a property is given for a number of years provi condition that the lease is renewable time to time, : even for endless time act to the desire of the lease holder, Such type of lease is called as perpetual | and as long as there is no violation of lease conditions the lessor can not t the lease. 2023.10.6. Easement : 515; (Sept. 2013) of another person. The person who enjoys the easements over a property is called Dominant awaer and the owner over whose property the easem vient owne: ents are enjoyed is called a at . The followings are some of the main easements Right to use land and air from and over the property of the adjoining owner's land. 2. Right of access from adjoining owner's land. 3. Right to run and maintain water and drainage pipes through the neighbour's land. 4. Right of flow of rain water over owner's land. 5. Right of support for a building from the adjoining owner's land. The easement rights may be acquired due to continuous and uninterrupted enjoyment for a period of 20 years, or easement rights may be granted by document. 9.4 Property income, Gross income, Net income : ss income and Net income : Gross income When outgoings are deducted from gross income, it is called net income. Usual outgoings are : taxes, premiums, repairs, insurance, management and collection charges, loss of rent, sinking fund, ete. 1. The total income from different sources is called gross income. Net income = Gross income - Outgoings Net income < Gross income 2. Gross income = Net income + outgoings 3. Gross income > Net income * Gro: cficial| 4. Net income is the true income. income is the supe’Engineering Economics, Esti Sept. 2013, June 2014, May 2015, Dec. 20; / (2) /Outgoings : { \arke term outgoing is used to indi ion with the property so as to maintain the revenue from it. jicate the expenses which are to be incu: in connecti ‘The usual types of outgoings are briefly described below : (i) Taxes (i) Repairs and maintenance (iii) Management and collection charges (iv) Insurance (v) Loss of rent (vi) Sinking fund (vi) Ground rent (viii) Miscellaneous (i) Taxes : These include Municipal taxes, such as + Water supply tax + Drainage tax * Property tax + Street light tax . Education tax, etc. These taxes are calculated on th i i _ ; on the basis of certain % of “annual rental Annual rental value = gross rent ~ amount of yearly repairs 2023110.23 17:56Fee BP*. Vary from 4 t gee Supervisi Ng petty . SW vy re atendant, electric charges mr Per for staircase and. Qu id. com: MP and lift, ao For small buildings having no sip os lift, owner collects the rent himself, out , outgoii This includes ‘8. This amount does nl a ‘© common pump or light etc., and the ) 188 on this account is practically zero. urance : a we, oe Of actual insurance premium is considered as an ee Gon cared a *s be insured at all, but this does not mean lade for insurance premium. The rate of i Premium depends on various factors such as the type of construction, nature of occupancy, facilities for fire protection and fire ~ fighting, etc. (v) Loss of rent : Part of a property may remain vacant for some period and will not fetch any rent for that period. Therefore, the loss of rent is considered as outgoing expenses and doducted from the calculated gross rent. (vi) Sinking fund : Sinking fund is an amount which has to be set a side at fixed intervals of time (say annually) out of the gross nes 80 pe at oi end \ (May 2015, Nov. 2018) Depreciation is the gradual loss in the value of the property due to its use, life, wear, tear and decay. This is an assessment of the physical wear and tear of the building or property and is naturally dependent on its original condition, quality of maintenance and mode of use. Thus, the value of a building or property (but not land) decreases gradually up to the utility period due to depreciation. A certain percentage of the total cost may be allowed as depriciation to determine its present value. Usually a percentage on depreciation per annum is allowed. The general annual decrease in the value of @ property is known as ‘annual depreciation’, Usually, the percentage rate of depreciation is less at the begining and gradually increase du ring later years. Present value of property = Initial cost - total amount of depreciation, * Types of depreciation : ‘The types of depreciation are : (a) Physical depreciation 1. Wear and tear from operation 2. Decrepitude i.e. action of time and other elements (b) Functional depreciation 1, Inadequacy or suppression 2. Obsolescence379 (Sune 2014, May 2015) tecomes less due to obsolescence, e obsolescence may ‘The 'y be due to the reasons such as progress in arts, changes iq fashions, changes in A in fa ei Planning ideas, new inventions, improvements in design , ete, A machi technique ae aehine of old design may become obsolete, though it may be in good running condition and its value will be less. Thus, though the property is physically sound, it may become functionally inadequate and its economical returns become less. + Types of obsolescence {a) Internal obsolescence : () Poor or old design (i) Change in type of construction (iii) Change in kind of construction (iv) Change in utility demand (o) External obsolescence : (i) Poor original location (ii) Change in the character of the district ences such as, construction of factori (iii) Specific detrimental influ proximity of public building, traffic locations, noises, etc. p-6 iv) Zoning laws jation and obsolescence : Qo @ Ussrace ieee (May 2012, Dec. 2015, May 2016) ie ainspmcuten | 1. Physical loss in the value of the i Property due to wear, tear and decay , ete. is known as depreciation: Loss in the value of the property due to change in design, in fashion,, is known in structures, etc. obsolescence.Engineering Economics, Estimation and costh 2. The decrease in the value of the| 2. The value of property increases property is gradual and slow. decreases at a rapid rate. 3. Depreciation depends on its original] 3. Obsolescence depends on no: condition, quality of maintenance progress in the arts, inadequacy and mode of use. present or growing needs, etc, 4. This is variable according to the age| 4. This is not dependent on age of of the property. More the age, more building. A new building may sui will be the amount for depreciation. in its usual rent due obsolescence. 5. There are different methods by| 5. At present there is no method which the amount of depreciation calculation of obsolescence. can be calculated. ite. - Straight line method ~ Constant percentage method + Sinking fund method, etc. ‘Methods of calculating Depreciation : (June 201 _The various methods of calculating depreciation are as follows : 1. Straight line method 2. Constant percentage method 3. Sinking fund method 4. Quantity survey method 1/ Straight line method : vai ‘Annual depreciation = Annual decrease in value of a property 2023.10.23 17D = Annual depreciation C = Original cost $ = Scrap value n= life in years pepreciation of the property after m years eater 9) 7 wu xm =mxD Book value after m years ec fE=9) nn "ed = =C-mxD 2. Constant percentage method or Declining balance method : In this method it is assumed that the property will loec ite value byve. constant percentage of its value at the begining of every year: I id sattnod, decreas fn the value of Property ft the, DSpen ES Sa Bee eta detrense sn. yatus fn the Inter yours foot Soses tesa niles cniliahe fd: dalentacing dopetontion of =aihinee- ‘ Percentage rate of annual depreciation,ie Engineering Economics, Estimation and costing 582 os This formula does not hold good when scrap value (S) is equal to zero, 3. Sinking fund method : In this method the depreciation of the property is assumed to be equal to annual sinking fund plus the interest on the sinking fund for that year. Depreciation = Annual sinking fund + Interest on the sinking fund that year. If, A = Annual sinking fund bed etc. = Interest on the sinking fund for the subsequent ye: C = Original cost, Life | Annual) Interest | Depreciation Total Book value lin years| sinking] on sin- | for that | depreciation fund |king fund] year A - A A CA 2 A b Atb 2A +b C - (2A + b) z A ic Ate 3A+bte C- (3A +b+e) 4 A a ASG | 400 bees dl Colas bs cd If i is the rate of interest, annual sinki 1 Rs. in n years. 2023.10.2023:10:23 17:55Engineering Economics, Estir c-s Annual depreciation, D = —— 30,000 - 3,000 a 10 D = 2700 Rs. Book values at the end of each year. Example-3 : A building was constructed for Rs. 1,00,000 before 20 years. of the building is 80 years. Calculate total depreci take rate of interest as 6%. Solution : Here, C = 1,00,000 Rs. n= 80, S=0 2023.10.23 17:55= 36.78 Rate of depreciation at 20 years = px q = 0.000573 x 36.78 = 0.0211 After 20 years, total depreciation = C x 0.0211 = 1,00,000 x 0.0211 Example-4 : An owner of a property create a sinking fund by depositing Rs. 2000 from rent amount every year. He wishes to make extension of building after 20 years. If rate of interest is 10%, How much amount will be accumulated ? Solution : Here, n = 20 years i= 01 Amount accumulated qe tpt =! for annual deposition of 1 Rs. after n years.(ee Engineering Economics, Estimation and cost (i) Straight line method (ii) Constant percentage method (iii) Sinking fund method Solution : (i) Straight line method : C = 24,000 Rs. S = 6,000 Rs. n= 6 year c-s n Annual depreciation D = _ 24000 - 6000 6 D = 3000 Rs. Annual depreciation is Rs. 3000. Book valu les at the end of each year is calculated in the table. (ii) Constant Percentage method. Rate of annual depreciation p = 1 ZOX (OPE RE ELez Book value at the end of first Book value at the end of 2nd 587 i Ton 24000, = 0.2062 depreciation for 1% year = 24000 x 0.2062 = 4948.8 = 4949 Rs. year = 24000 - 4949 = 19051 Rs. depreciation for 2"4 year = 19051 x 0.2062 = 3928.32 = 3929 Rs. year = 19051 — 3929 = 15122 Rs. other calculations are shown in table below, ‘Annual depreciation (Rs.) 4949 3929 3118 2475 1965 1560 total depreciation] | Book value at the (Rs.) end of year (Rs.) 2 24000 19051 15122 12004 9529 7564 6004 PL OVS[588 Engineering Economics, Estimation and cos (1+0.05) st 1 = 2646.31 Rs. (Sinking fund instalment for the 1% year) Calculation of interest : (i) Sinking fund instalment for 2™4 year. = 2646,31 x {ti} =1 here, n= 2 2 ‘ (1 + 0.05) i= 0.05 = 2646.31 x SE = 5424.93 Rs. life | Annual sinking | interest on sinking] total depre- | Book value at (years) | fund (Rs.) fund (Rs.) ciation (Rs.)| end of year 0 = 5 = 24000 1 2646.31 - 2646.31 21353.69 2 2646.31 132.32 5424.93, 18575.07 | 2646.31 403.56 8342.49 15657.51 4 2646.31 820.76 11406.00 12594.00 5 2646.31 1391.0 14622.53 9377.47 6 2646.31 2122.14 18000 6000.00 Interest for3" year = 5424.93 - 2 x 2646.31 = 132.32 Rs. (ii) Sinking fund instalment for third year, = 2646.31 x {1+i)’=1 i ‘ (1+0.05)° -1 = 2646.31 x U40.05) =1 0.05 horn ns & = 8342.49 Rs, i= 0.05 2023.10.4 ~ 3x 2646.31 : \, = 403.56 Rs, 4 (iii) Sinking fund instalment for 4t® year, = 2646.31 x {+i)*-1 i here, n= 4 \ ’ = 2646.31 x {1+0.05)*-1 oe 0.05 inty = 11406 Rs. th interest for 4" year = 11406 - 4 x 2646.31 = 820.76 Rs. (iv) Sinking fund instalment for 5' ye = 2646.31 x oer here, n= 5 ig i= 0.05 miaehe ar x Ones o! 0.05 = 14622.53 Rs. Interest for 5 year = 14622.53 - 5 x 2646.31 = 1391 Rs. (v) Sinking fund instalment for 6‘ year bicereie ce tee! here, n= 6 . i i= 0.05 = 2646.31 * 0.05 = 18000 Rs. ar = 18000 - 6 x 2646.31 = 2122.14 Rs. interest for 6 yes | ple-6 sent value of a property is Re. 5.0 lacs. Scrap value is ay iene a ae years. Calculate its depreciated cost after 12 years by Ze r useful life of _—“onstant percentage method. PYRE SEngineering Economics, Estimation and cos (50 Solution : C = 5,00,000 Rs. = 0.10 x 5,00,000 = 50,000 Rs. n= 25 years m= 12 years As per constant percentage method Depreciated cost after 12 years -< iG = 5,00,000 x | ———— (sto = 5,00,000 x (0.1)948 = Rs. 1,65,565.60 Example-7 : A person purchased a building for Rs. 2,50,000, having cost Rs. 50,000. If life of building is 30 years and rate of interest is 6%, fi annual installment of sinking fund. Assume scrap value as 10% of the const cost. Solution : Cost of land = 50,000 Rs. Construction cost = C = 2,50,000 - 50,000 = 2,00,000 Rs. Scrap value S = 0.10 x 2,00,000 = 20,000 Rs. total amount of sinking fund required (C - S) = 2,00,000 - 20,000 = 1,80,000 Rs. i= 6% = 0.06 n= 30 years annual instalment of sinking fund,2023.10.23 17:54{= Engineering Economics, Estimation and _ (1+ 0.08)" 0. 08 = 113.28 rate of depreciation for 30 years = p 4 = 0.0047 x 113.28 = 0.5324 total depreciation in 30 years = 0.5324 x 1,91,250 Rs. = Rs. 101821.50 Depreciated cost after 30 years = 2,25,000 - 101821.50 = Rs. 123178.50 Example-9 : An owner of a building deposits Rs. 2250 every year in his to accumulate sinking fund for repair and maintenance of his building. If interest is 7%, how much amount will be accumulated after 20 years ? Solution : n= 20 years i= 7% = 0.07 If 1 Rs. is deposited every year, amount accumulated after n years, = 2250 x 40.995 = Rs, 92,238.75 Example-10 : A person purchased a motorcycle for Re. 38,000. The life of motor cycle is 20 years and rate of int Calculat tereat ta of sinking fund. ites aucc= Rs. 38,000 n= 20 years i= 8% = 0.08 jonual instalment of sinking fund () cx 1 asi - 38,000 x 0.08 (1 + 0.08) S = Scrap value = 0. 3040 “3661 = Rs. 830.37 yan? ee Example-11 : If Rs. 10 lacs are required to be accumulated at 7.75% at the ed of 15 years, find out the amount of annual instalment. Solution = If rate of interest is i, annual instalment to accumulate Re, 1 after & years. e silly eas i = 7.75% = 0.0775 * 0.0775 n= 15 years (140.0775) C= 10 lacs Rs. 1. annual instalment to get = 0.0375 ++594 Engineering Economics, Estimation and Costing Solution original cost of plot = 2,00,000 Rs. If this amount is deposited in the bank for 5 years at 9%, amount availa =Cx(1+9" = 2,00,000 x (1 + 0.09)5 = 3,07,725.0 Rs. Present cost of plot = Rs. 3,60,000 Net profit = 3,60,000 - 3,07,725 i If we deposit Rs. 5000 every year at rate of compound in how much amount will be accumulated ? Example-13 9% for 20 years, Solution : If 1 Rs. is deposited every year at rate of interest i, available is, for n years Chie —1 ' where, = (1+ 0.09)" _1 ; SS hos ra i= 9% = 0.09 = 4.504 0.09 n = 20 years = 51.16 = Rs. 2,55,8002023:10:23'17:53Engineering Economics, Estimation and o jo a (1+ 0.10) 0.10 3.727 = 0.01746 Annual instalment of loan =Ci+S.F) = 1,00,000 (0.10 + 0.01746) Example-16 : The cost of newly constructed building is Rs. 2,50,000 and fj is 50 years. By preciated cost of building terest on sinking fund is 6 % and on capital is 8 %, value is 15 % of the cost of construction. Solution : C = Rs. 2,50,000 S = 0.15 x 2,50,000 = Rs. 37,500 Amount of sinking fund required, C - 8 = 2,50,000 - 37,500 = Rs. 2,12,500 depreciation rate for 30 years = Pxq = 0.00344 x 113,275 = 0.3896 total depreciation in 30 years = 0.3896 x 2,12,500= Rs. 82,799 e Depreciated cost after 30 years, = 2,50,000 -~ 82,790 Rs 67,210 gxample-17 : For a building sold to day ar find present cost of the building. Take solution : i= 6% = 0.06 if Rs. 5,00,000 are available after 5 Tate of interest 6 %. n= 5 years C= Rs. 5,00,000 Present value of Rs. 5,00,000 1 = C x ——— = 5,00, 000 x (+i (1 + 0.067 5,00, 000 1.338 Rs. 3,73,692 Example-18 : What will be the depreciated value at the end of 10" year of a Droperty of the cost Rs. 10,00,000 and its salvage value is Rs. 90,000 after 50 Years, Consider straight line method and constant percentage method. Solution : (8) Straight line method C = Rs. 10,00,000 S = Rs, 90,000 n = 50 years pe o-8 | a «= (20,00, 000 = $0,090) = 18,200 Rs. ... Annual depr on XE OVA)598 Engineering Economics, Estimation and costing Now, depreciation after m = 10 years = 18,200 x 10 = 182000 Rs. Depreciated value after 10 years = 10,00,000 - 1,82,000 = 8,18,000 Rs. (b) Constant percentage method : m = 10 years n = 50 years iS 10,00,000 Rs. S = 90,000 Rs. depreciated cost after 10 years 10 sym _ 90,000 50 _ c Be 10,00,000 [rovo-ten| 6,17,800 Rs. Example-19 : Find out the yearly instalment of loan o! interest 12% is to be repaid in 15 years. f Rs. 50,000 at rate of (May 2018) Solution : Loan amount = Rs. 50,000 Time period = 15 years rate of interest = i = 12% Alternatively : Annual instalment of loan S.F. coefficient (+i? xi 1:0 an “4a? —1 50,000 x (1 + 0,12)!5 x 9.12 0.12 (1+ 0,12)'5 ] * (+ 0.12)5—4 AWNoi8) 32, 841.39 599 aaa 0.12 = qa7z = 0.02682 x = Rs. 7342.14 kis Annual instalment -Cii+s.r) = 50,000 (0.12 + 0.02682) = Rs. 7342 ‘ ment of sinking fund of a building cating Rs. 5 lacs and life of building is 50 years. Take rate of interest on S.F. 6% and 10% scrap value. Solution : C = Rs. 5,00,000 S$ = 0.10 x 5,00,000 = Rs. 50,000 © - $ = 5,00,000 - 50,000 = Rs. 4,50,000 (Amount of S.F. required) i= 6% n = 50 years Annual instalment of S.F. (I), i 1-(-s)* Gq 0.06 ae = 4,50,000 x (74 0.06) -1 4,50,000 0.06 cs oo AceEngineering Economics, Estimation and costing Example-21 : A concrete mixer was purchased at price Rs. 1,00,000. Assum its life 12 years and 10% salvage value, workout depreciated cost at the end third year, by (i) Straight line method (i) Constant percentage method. Prepare a table showing depreciation during the year and depreciated cost end of the year for first three years. (May 2017, Nov. 2017, 20; Solution : (i) Straight line method : C = Rs. 1,00,000 S$ = 0.10 x 1,00,000 = Rs. 10,000 C-S = 1,00,000 - 10,000 = Rs. 90,000 (total depreciation) n= 12 years. Annual depreciation = 2°:000 . Rs. 7500 depreciation after 3 years = 3 x 7500 = Rs. 22500 depreciated cost after 3 years = 1,00,000 - 22500 AVX OVEN EX2023.10.23 17:53)Engineering Economics, Estimation and costh 02 Example-22 : Calculate the percentage depreciation based on sinking fu mple-22 : hod i a building having life of 60 years and age of 15 years at 3.5%. metho - Id be the depreciation percentage for the above building at the What woul of 40 years at 5% ? Solution : (i) Depreciation % at 15 years at 3.5% : i (0.035) me he tn 60 = 0.0081 (1+ i)? -1 7 (1+ 0.035) -1 qa (+i 1 . (1+ 0.035)! -1 . 19.996 i 0.035 Annual rate of depreciation = p x q % = (0.0051 x 19.296) x 100 = 9.841% (ii) depreciation % at 40 years at 5% : i 0.05 es Oe ern Gy P= (+i)? -1 * (1+ 0.05)—] = 0.0028 = (1+iP -1 _ (1+0.05) -1 igh ei. 7.) Olea ae = 120.80 Annual rate of depreciation = p x q% = (0.0028 x 120.80) x 100 + The cost of newly constructed The life of building is 75 eyars. Determine the dey by straight line method, constant % meth compound interest. The scrap value of bu; building was Rs. 1,50, Preciation in the 30 year of ‘od, and sinking fund method at the ding is 10% of its construction (June Solution : C © Rs. 1,50,000 = 00 2023.102023.10.23 17:532023.10.23 17:532023.10:23'17:52606 Engineering Economics, Estimation and costing * Difference between market value and book value : Market Value (M.V.) Book Value (B.V.) 1. When a property is sold in an open} 1. Book value = Original cost - total market, the amount obtained is depreciation till the end of that called market value. year. 2. The value is fixed by purchaser. 2. The value is fixed by the rate of depreciation. 3. M.V. may increase or decrease as| 3. B.V. decreases with time. But for per situations. non-degradable metals B.V. remains constant. 4. The value may be constant for a} 4. The value can not be constant, period. rather there is a gradual fall. 5. This is applicable to any type of] 5. This is not applicable in case property. land or metal articles like steel copper or gold, etc. 6. Market value is considered for] 6. Book value is considered f valuation. accounts book of a company. 7. M.V. does not depend on cost of| 7. Property. B.V. depend on cost of property. 8. M.V. depends on forces of demand | B.V. is not variable due to i and supply, development of area etc. demand and supply or develop: of the area. 3. Serap value : (Dec. 2015, May the value of dismentled materials of a property at the end utility period. For a building when the life over at the end of its utility the dimentled materials such as steel, bricks, timber, etc. will fetch a certain which is the scrap value of the building. Scrap value The scrap value of a building may be about 10% of its total cost of cons! The cost of dismentling and removal of the rubbish material the total receipt from the sale to get the scrap value. ‘The scrap value is also known as junk value or demolition value. 2023.10LS) ae But there are times when salvage value is of sizable amount, and there are @, | other times when it is a minus quantity. For example, the scrap value of a R.C.C. i | and removal will be costly. * Difference between scrap value and salvage value : Sn, - Scrap value is the value of (May 2018) Salvage value _# 1, It is the estimated value of a Property at the end of its useful life without being dismentled. dismentled materials of a property at the end of its utility period. Rs _ ee 2. Scrap value is counted in the calculation of depreciation of a Property @ 10% of the cost of the building. 2. Ordinarily, the salvage value factor in the calculation of depreciation is omitted by accounting scrap value. —_ 3. Property is dismentled. . The property is not dismentled. Ser lue is not counted as a| 4. There are times when it is a minus ‘ap value is quantity. minus quantity. 5. Salvage value dominate scrap value in the calculation of depreciation. Scrap value of an asset is morely limitation. sale of scrap and has a 4 Accomodation value + nding agricultural land of a city which is expanding The value of the aoe the land is converted into accomodation land after ‘bly will be more : competent authority. The value of such land is known ing approval from the “ccomodation value. ~ BONS ie greater than that of agriculture land and less than The accomodation value is grea! °f building land. a ; 2023.10.2311 i[wos Engineering Economics, Estimation and costing] 6. Distr (ee. 2015) value In case a property is sold at a lower price than the market value at that time, it is said to have a distress value. Such distress value may be due to any one of the following reasons. + Financial difficulties of the seller + Fear of war, riots, earthquakes, etc. + Quarrel among partners . Court decree . Insufficient knowledge of the seller + Intension to favour purchaser, etc. 7. Monopoly value : (Dec. 2018) In some cases, the property possesses certain advantages with respect to adjoining property due to its location, size, shape, etc. the owner may demand fancy price. Such value of a property is known as monopoly value. 8. Replacement value : It is the present value of a property or portions thereof if these have to be replaced at the current market rates. 9. Investment value : Investment value of a property indicates th Purchaser by keeping in view the advantages investment point of view. 10. Sentimental valu € amount offered by a prudent of possessing the property from known as sentimental value, This may cause due to the following @ (ii) reasons, ‘The owner is so much attached that he demands fancy price. ‘The situal and class of the property may suit a Prospective purchaser. PASO;Ifa (iii) Property is for sale and two prospective purchasers are determined to outbid eachother, the selling price shall definitely be higher than the market value. 11, Speculative value : A proposal to construct a national highway or airport or watet line or the like in an undeveloped area will cause a rise in value. Speculators purchase such properties at a low price as far as possible, known as epeGulative yale aceieeetiiee again at profit after a short duration, without spending any further amount towards its development. 12. Annual value : The local authority has to decide the annual value of the property so that taxes can be calculated on that basis. Such annual value of the property has to be fixed by observing the principles of rating valuation. 13. Potential value : (Dec. 2015) When a property is capable of fetching more return due to its alternative use or by advantageous planning or by providing some development works, such inherent value of a property is known as potential value. 14. Occupation value : When the purchasers are attracted to own the property for occupying for their personal uses which is regarded as a necessity and no satisfactory substitutes exist than this is known as occupation value, 15. Present value : The value of a property calculated front present market rate is as present value. ae seit * Factors affecting value of a property : A ‘The various factors affecting value of a property are\: ° 1, Demand and supply + Pew buyers as compared to a number of properties available for sale in a rs a locality will result in low prices for the property and vice-versa. 2. Maintenance = Ita property is properly maintained its life will increase and its value will be AWTS Vy610 Engineering Economics, Estimation and Costing) |. Rise in population : Rise in population due to growth of new industries will result in heavy demang for land, building and properties. 4. Abnormal conditions : Due to abnormal insecure conditions like riots, war, earthquakes, etc, values may drop and remain so for a considerable period. 5. Cost of construction : The present cost of construction affects the value due to rapid change of price index in comparison with the rate of depreciation. 6. Purpose of purchasi The purpose for which the property is purchased, greatly affect the value of the property. If a land is purchased for residence, its value will be higher 7. Town planning Act : 7 If the planning authority of a locality decides to convert a particular residential zone into a commercial zone, there will be sudden shooting up of the values in that area, : 8. Climatic conditions ; In a region of good climate, more an result in higher value of property. 9. Life : id more people will Prefer to stay and will New property has higher value and old Proj perty has lower value, 10 Improvement by public schemes ; The taking up of any public service scheme; Hic, water-tiney/ sewers a ies of transport, etc. to an area will tend to make the area more atone adi will be closely followed by an increase in land values, 11. Migration decrease the land price: 12. Interest of schedule banks ; by the lowering of the scheduled bank interest, hj b rn » higher may i at People for making more money available for investment in ae ae eae 2023.10.23 17:51) forae 9.7 Miscellaneous topics : 1. Annuity : Annuity is the net installment of annual or Periodical payment for repayment of the capital amount invested in a property for a specified period. Generally, annuity indicates annual payments. Annuity is either paid at the begining or at the end of the year, Types of annuity : (i) Annuity certain : If an annuity is payable at the end of each period for a certain number of years, it is known as annuity certain. (ii) Annuity due : When the annuity is payable at the begining of each period of year and Payments continued for definite number of periods, it is known as annuity due. (iii) Deferred annuity : When the annuity commences after a few years from the actual date of the capital investment, it is known as deferred annuity. (iv) Perpetual annuity : When the annuity is receivable for an indefinite period, it is known as perpetual @nnuity. Though annuity means annual payment, the amount of annuity may be Paid by twelve monthly instalments or quarterly or half yearly installments. 2. Ammortization When the payment of a debt is made by a series of equal periodic instalments, it is known as the ammortization. This is accumulation of sinking fund at compound interest for payment of debt, Each periodic payment includes two provisions : (A certain portion of the capital (i) An account of interest on the outstanding, debt. Installment of loan = P (i + SF)72 Engineering Economics, Estimation and costing P(1 +i) xi heen 3 where, P = Amount of loan i= rate of interest n = number of annual instalments i unit 3. Sinking fund (S.F.) : (May 2015) Sinking fund is an amount which has to be set a side at fixed intervals of time (say annually) out of the gross income so that at the end of the useful life of the building or property, the fund should accumulate to the initial cost of the Property. A building, a machine, a vehicle, etc. becomes useless after certain years, ie. at the end of its life. Hence, it is necessary to make some provision whereby the owner can accumulate to a sum required for rebuilding the premises or can replace the article. For this purpose sinking fund is periodically collected and deposited in a bank to get highest compound interest or sinking fund insurance Policy is contracted with the insurance company throughout the life of building. Fer land sinking fund is not required. Mee} einiing fand required = coat of new property — scrap valuie of old property. Annual instalment of S.F. = (C — s) x —_i___ ayaa where, C = Cost of new property * S = Scrap value of old property i = rate of interest n = life of the property 2023.10)2023.10.23 17:504 Engineering Economics, Estimation and costing | 614 In this case, 1 oes where, SF. = (4i,)) -1 i = rate of interest for principal rate of interest for S.F. Single rate Y.P. : To calculate Y.P. when the rate of interest on capital investment and rate of interest for deposit of sinking fund is considered same, then this is known as Y.P. for ‘Single rate’. ie. i Dual rate Y.P. : To calculate Y.P. when the rate of interest on capital is different from the rate of interest on sinking fund, this is known as Y.P. for ‘dual rate’. Normally, i > i, 5. Capitalized value (C.V.) :- (Sept. 2013, May 2015) The capitalized value of a Property is the sum or amount, the interest on which at the highest prevailing rate would be equal to the Property. net income out of the If a property produce a net income of Rs. 5000 per annum desires 8% return on his capital, he sho and a purchaser uld pay (invest), and vice-versa.PLAS OWEDEngineering Economics, Estimation and costing Capitalized value = Net income ~ Y.P. CV. = NI. x Y.P, = 900 x 16.67 Example-3 : A lease hold property is to produce a net income of Rs. 15000 per annum for next 50 years. What is the value of property ? The owner desires 8% return on his capital and sinking fund to replace the capital is also to accumulate at 8%. What will be the value of the property if the rate of interest for redemption of capital is 3% ? (Dec. 2015) Solution : N.l. = Rs. 15000 = 00 i= 8% i, = 8% n= 50 years 1 i Res iher. SF. = @sayhon 0.08 * (+ 0.08)5?—4 eS = 0.001743 CV. = NIL x YP. = 15000 x 12.233 = 11.252 NA. x ¥.P, * 15000 = 11.252 = Rs. 1,68,780 2023.10.23 17:49VES WWE2023.10.23 17:49N.L. = 90,000 ~ 27,000 = 63,000 Rs. 1 rt 1+8.P, 2 ne ee 0.0725 +0. 0204 1 ~ 0.0929 = 10.764 CV. = NIL. x YP. = 63,000 = 10.764 As offer value = Rs. 10,00,000 is more than the C.V. = Rs, 6,781, er of ‘o sell the property. Example-7 : An investor construct a building in a developing ; He spent Rs. 1,00,000 for land and s. 3,00,000 for construction, feturn of 5% on land and 12% on building. If outgoings are as below, } () Government taxes = 6% of net income (i) Water supply and sewerage tax Rs. 940 per year. (iii) Repair and maintenance cost = 1.2% of construction cost. (iv) Management and collection charges = 8% of gross income Other outgoings = 12% of gross income. Solution : | He wishes net income of 5% on land and 12% on building. total net income expected = 0.05 x 1,00,000 + 0.12 x 3,00,000 = 5,000 + 36,000 “ N.I. = Rs. 41,000 013)Outgoings (Annual) (i) govt. taxes = 6% of net income = 0.06 x 41,000 = Rs. 2460 (i) _w/s and sewage tax = Rs, 940 (iii Maintenance & repair = 1.2% of construction cost = 0.012 x 3,00,000 = Rs. 3600 (iv) Management and collection charges = 8% of gross income = 0.08 x GI. (%) other outgoings = 12% of gross income =0.12x GI total (outgoings) = 2460 + 940 + 3600 + 0.08 G.I. + 0.12 GL. = 7000 + 0.20 G.I. Now, : Net income = total income ~ total outgoings (NL) (G.1) ; 41,000 = G.I. - (7000 + 0.2 G1) 41,000 = G.l. ~ 7000 - 0.2 G.I. 41,000 = 0.8 G.I. - 7000 0.8 G.I. = 48,000 G.L. = Rs. 60,000 60,000 2 Monthly rent = = Rs. 5,000 " onstruction. If total outgoings are 40% of gros income, how much rent he should get > os Solution : He wishes net. return of 436 60:lend and 10% on construction. total net annual return,2023.10.23 17:49622 Engineering Economics, Estimation and costing N. (0.40 G.I. + 2500) 23,750 = G.I. - 0.40 G.I. - 2500 26,250 = 0.60 G.I. G.l. = Rs. 43,750 43.750 Monthly rent = = Rs, 3646 (Required) Rs, 2000 monthly rent is not proper. Example-10 : If rate of interest on capital is 8% and on redemption of capital is 3%, life of property is 40 years, calculate years purchase. Solution : i= 8% = 0.08 i, = 3% = 0.03 n= 40 years Y.P. = Year's purchase 1 amr y ae bees PSF apabiinL ad : 1 0.03 0.08 + 0.0133 * (140.03) —7 cal 0.03 0.0933 * 2.262 = 10.718 = 0.0133 Example-11 ; + A building fetches gross m otitica’y (June 2014) (1) i= 8% = 0.08 i, = 4% = 0.04 n = 40 years Gl. = 12 x 5000 = Rs. 60,000 Outgoings = 0.40 x 60,000 = Rs. 24,000 YL ER EE2023.10.23 17:49624 Engineering Economics, Estimation and costing (ii) |,000) Repairs = 0.006 x (8, = Rs. 5160 (iii) Sinking fund = Rs. 4000 (Per year) Total out-goings = 0.25 GI + 5160 + 4000 = 0.25 GI + 9160 Net income = Gross income - total outgoings Ni. = G.I. - (0.25 GI + 9160) 1,46,600 = G.I. - 0.25 G.I - 9160 G.I = Rs. 207680 Annual rent = Rs. 207,680 207, 680 Monthly rent = —35— Example-13 : From the following details find out the rent of a property. (i) Cost of land = Rs. 6,50,000 (i) Cost of construction = Rs. 8,00,000 (iii) Expected return on investment = 10% (iv) Interest rate for sinking fund = 6% (*) Maintenance = Rs. 10,000 per year (vi) Other outgoings = 25% of gross rent (vii) Expected life of the building = Solution : 60 years Annual net return required = 0.10 x [6,50,000 + 8,00,000) N.I. = Rs. 1,45,000 PX Salat)PAYA WELDExample-14 : A loan amount of Rs. 50 lacs has been granted by life insurance corporation to a municipality for implementation of a water supply seo The loan will be re-paid by way of annuity @ 8.0% interest p.a. in 20 sean from the year of commissioning of the scheme. Find out the amount of annual instalment of loan, in the following cases : (i) First instalment is paid at the time of taking loan i.e. annuity is due. (i) First instalment is paid after one year of taking the loan, i.e. annuity is certain. Solution : (i) Annuity is certain : n= 20 (1 + 0.08)? x 0.08 (1+ 0.08)?0 —7 = 50,00,000 x $-3738 - [5 o0 164.41 Ra, (ii) Annuity is due : Loan amount = Rs. 50 lacs. instalment of loan = 50,00,000 x First instalment = Rs. 5,09,164.41 C = 50,00,000 - 5,09,164.41 = Rs. 44,90,835.59 (i+ iy? x i Instalment of loan = ¢ x \*4_* i (+i <1 19 = 44,090,895 « {1+ 0.08)" « 0.08 ¢ 08)’ = 44,90,835 x site CREAT + 19 Instalments, VAX Sal Oye Se2023.10.23 17:48Engineering Economics, Estimation and costing C.V.= NI. x Y.P. = 3500 x 11.261 = Rs. 39414 difference of value after and before repair = 39,414 ~ 26,376 = Rs. 13,038. (increased value of property) Since, the ‘estimated cost of repair Rs. 30,000 is greater than the increased value of property after repair Rs. 13,038, it is not economical to carry out the repairs and it is better to leave it as it is. 9.8 Valuation Tables and their uses In order to save time and reduce the chances of error in elaborate and laborious mathematical calculations, the valuation tables are prepared so that by referring to them, suitable coefficients can be found out. (May 2012, Sept. 2013) Valuation tables are worked out based on respective mathematical formula for simple and compound interest for sinking fund, depreciation, interest on capital, fete a evable at the end of 'n' years at a certain rate of interest, etc. 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. Following valuation tables are in use. The te is no specific number and those given below are serial numbers only. Table-1 : To find the amount to which Re. 1 wi number of years. Let, i= interest per annum on Re, 1 Interest of Re. 1 after 1 year = i Amount receivable after 1 year = (1 + i) Amount receivable after 2 years = (1 + deasai é ~1 erie = (1 + i? Re, For Re. 1 amount receivable after n years = (1+ an 17:48 CPOValuation 5 9) 2] Example . What is the amount of Re. 1 at 6% after 10 years ? 6% = 0.06 n = 10 years c=(l+ip d = (1 + 0.06)10 e = 1.79 ... also from table - 1 Table - 1 ) Amount of Re.1 at the end of a given number of years s Year rate of interest % . [ ex 5.5% | 6% | 6.5% | 7% | 7.5% 10% r i 1.06 1.07 y 1.07 | : 1.13 : Table-2 : To find the present value of Re. 1 receivable at the end of a given number of years. Present value of Re. 1/- = +i)? i » to This formula indicates, how much amount is to be invested at present, to get Re. 1 at the end of n years. Boxe 3 17:48[830 Engineering Economics, Estimation and costing Example : What is present value of Re. 1 receivable after 8 years at 12% rate of interest ? 1 1 Basa " @+0.12) = Rs. 0.4039 Table-3 : How much amount to be deposited every year to accumulate 1 Re. after n years. or To find the amount of annual sinking fund for the redemption of Re. 1 capital Instalment of S.F. = p = (1+ i) Table-4 : If Re. 1 is invested every year, how much amount will be accumulated after n years ? a+iyn Example-1 : If i = 10%, n = 10 years, join column A, B and C Properly. 1. If Re. 1 is invested amount receivable after n years . Present value of Re. 1 receivable at the end of n years . If Re. 1 is invested every year, 5 amount accumulated after n years }. Amount of sinking fund for redemption of Re.1 capital after n years . Years purchase (¥.P.) PAW SalaPVA OWT)Engineering Economics, Estimation and costing 632 A B c ij 2.5937 1. If Re. 1 is invested (1 + i) amount receivable after n years 0.3855 2. Present value of Re. 1 receivable at the end of n years 1h 3. If Re. 1 is invested every year, eae 15.9374 amount accumulated after n years i 4. Amount of sinkingfund for * @r+p?-1 0.0627 redemption of Re.1 capital after n years (1+i" -1 5. Years purchase (Y.P.) Tas" Ese Example-2 : Join A and B properly. 6.1461 1. On investment of Re. 1/- amount receivable after 80 years @ 2% 2. Present value of Re. 1/- receivable after 70 years @ 3% 3. Amount receivable after 60 years @ 4% on investment of Re. 1 every year Years purchase in 40 years @ 6% Amount of sinking fund instalment for redemption of Re. 1 capital after 50 years @ 5% = (1+ 0.02)80 = 4.8754 XSI)2023.10.23 17:47Faginearing Economies, Estimation and costing 634 4.8754 0.1263 237.99 15.0463 0.0048 Example-3 : A person requires Rs. 15000 after 5 years for the repair of his building. How much amount should be invested by the person @ 8% to get required amount after 5 years ? Solution : Present value of Re. 1/- receivable after n years @ i, 1 “ar i= 0.08 ; n= 5 years ~ (10.0895 = 0.6805 Present investment to get Rs. 15000, @ 8% after 5 years = 0.6805 x 15000 = 10208 Rs. Example-4 : If we deposit Rs. 1000 every year @ compound interest 7% for 25 years, how much amount will be accumulated ? Solution : i= 0.07 ~ (1+ 0.07/95 1 mr 25 years MECC? ere 0.07 | = 63.249 If Rs. 1000/- is deposited every year, amount accumulated after 25 years = 63.249 x 1000 = 63,249 Rs, 2023.10.23 17:472023.10.23 17:47Engineering Economic: Estimation and costing Example-7 : If for investment in NSC, amount is doubled after 6 yars, fing the rate of interest. Solution : Let, Rs. 100 is invested. Amount receivable after 6 years = 2 x 100 = 200 Rs. A=P(L+a" where, 200 = 100 (1 + i)® P = Amount invested A= Amount received after n years (1+ 9% =2 (1 + ) = (2/6 L+i= 1.122 i= 1122-10 i= 0.122 i= 12.2% Example-8 : An invester has paid a loan instalment of Rs. 7340 at rate of interest 12% for 15 years loan period. What will be the loan amount ? Solution : 12% = 0.12 n= 15 years 1, = 7340 Rs. (1+i)" xi (1+i)"=1 Re cy 2023.10.23 17:472023.10.23 17:47Engineering Economics, Estimation and costing 638 a) Example-11 : Find present value of an open plot of land purchased for Rs. 2,00,000 before 5 years. The owner wishes 6% return on investment and net profit of 25%. Solution : Purchase value of plot = 2,00,000 Rs. If this amount is deposited in a bank for 5 years @ 6% amount receivable, =Cx (1+ 9" n=5 = 2,00,000 x (1 + 0.06)5 i= 6% = 0.06 = 2,67,645 Rs. The owner wishes 25 % net profit. Net profit = 0.25 x 2,00,000 = 50,000 Rs. Present value of plot = 2,67,000 + 50,000 = 3,17,000 Rs. Example-12 : Prepare suitable pairs n = 30, i = 8%, () Sinking fund coefficient (ii) Present value of 1 Re. available after n years. (it) If Re. 1 is deposited every year amount accumulated, (iv) To get Rs. 1 after n years amount to be deposited. () If Re. 1 is deposited, Solution : (i) Sinking fund coefficient : amount accumulated after n-years. a 1 a 1 1 (1+ i)” ” (1+ 0.08) ~ 70.06 = 2-09938639 able. (») If Re. 1 is deposited, amount accumulated after n-years : (1 + i)” = (1 + 0.08)30 = 10.96 9.9Valuation methods for Property and land : seed (Sept. 2013, May 2015, 2016, 2017, Nov. 2018) A. Valuation methods for Property : e The different methods of valuation for property are 1, Rental method 2. Land and Building based method 3. Profit based method 4. Development method 1. Rental Method : (May 2015, Nov. 2016, 2018) In this method, the net rental income from a property is calculated after feducting all outgoings from the gross rent, and year's purchase (¥.P.) is calculated ‘fter adopting the current bank interest. The valuation of a property is worked out as under. Capitalized value = Net income (rent) x year's purchase [xem] Net income = Net rent = Gross rent ~ outgoings. When th .t from a property is known, this method is useful for valuation n the ren| & prop i i ; = Id, at the end of useful life of a building, land value is elec AX S XV eV640 Engineering Economics, Estimation and costing | ae The present value of land can be obtained as (] 5 i) Value of property = value of land + value of building. During valuation by rental method the following particulars shall be considered. + Land and its tenure, i.e. free hold or lease hold. + Future life of the building + Cubic content of the building . Gross rent + Outgoings + Year's purchase (Y.P.) . Capital repairs, etc. This method is very useful for a property with a new building. Once the fair rent is known, the method of calculations are straight and simple. This is a well known method and widely used to fix up taxes. * Disadvantages of valuation by Rental ethod : (Nov. 2016) (The actual rent paid must be proved to be fair rent, otherwise very little reliance can be placed upon it. (ii) Judicial judgement for outgoings under various heads is difficult. (ai) A property consisting of land and building valued together can not be proportioned afterwards. 2. Land and building based method : Properties which are used for special purpose outside the general range of comercial and residential properties as for schools, Police stations, or which perform non-profitable community functions where there is no direct silent of. tee valuation of such properties are made by this method. ee Valuation for under-developed, or own: ‘er occupied or Stier, damaged properties may be done by this m vacant possession ‘ethod of valuation,mg] ‘(ton Cost of new construction of building a = total construction area x present rate of construction Now, knowing the age of the building, estimate life of the building. med. Calculate depreciated cost of building. Present value of property = cost of land + depreciated cost of building. 3. d method : This method of valuation is very similar to the rental method of valuation and is most applicable in case of valuation of shops, hotels, cinemas, etc. In this method net profit is worked out after deducting all usual outgoings including interest of capital investment and also remuneration of labour rendered by owner. This net fair Profit can reasonably be realised in the form of rent and is multiplied by Y.P. to vel determine the capitalized value “capitalized value = Net income x year’s purchase ae CV, = NIL. x Y.P. N.I. = Total income ~ outgoings 4. Development method : be ‘Sometimes, undeveloped or under developed property is bought, developed and then offered for sale. The valuation of such properties would depend on initial investment, development cost and expected profit. a, This method of valuation is based on om, (a) Development of building estates Pt (b) Hypothetical building schemes \ding estate: or {a) Development of building “ Development of building estates means plotting scheme i oped with all the essential amenities and sold — x nti SE ee s manner so that the estate is worth more: ne ut in small plots in most advantageous ae Ripe. tos babeog” i When a city continues to expand then the land is a[542 Engineering Economics, Estimation and costing Valuation by development of building estates = present value - total outgoings Valuation procedure : (i) Find out net area of land Net area of land = Total area ~area of land required for essential amenities like roads, parks, water supply pumping stations etc. (@ 30% of total area) (ii) Calculate gross income Gross income = Net area of land available for sale x average sale price (iii) From gross income find out present value, Since all the plots of land are not sold at a time therefore, the gross income is deferred by half of the period that is likely to elapse before all the plots are sold. If a period of 6 years is required to sell all the plots, the gross income will be multiplied by the present value of Re. 1 in 3 years at the rate of 8% (say.) Following outgoings are deducted from the present value : + Cost of development * Payment for the easement rights * Engineering and supervision charges @ 4 to 7% * Stamp cost and incidental charges @ 10% * Developer's profit @ 15 to 20%. (b) Hypothetical building schemes ; Plot of land is estimated by capitalizing the om @ building, if erected on the land after Cost of development and building. XS IiValuation 3] B. Valuation methods for open land :” Valuation methods of an open land are as follows 1. Comparative method 2, Hypothetical method 3. Belting method 1, Comparative method : In this method, the various transactions of nearby lands are properly studied and then a fair rate of land under consideration is decided. Thus, this method will be useful only in case of an active market where there are large number of statistics are available for comparison. It should however be remembered that the method involves few dangers, if the market is stable, i.e. resistant to sudden change of condition. ‘There are two main factors on which this method is based, (i) sale prices (ii) similar neighbourhood lands. Following factor: s are to be taken into account while analysing value of land by this method. (i) Situation : Value of land which is situated in the business and commercial locality will be higher than lands which can only be used for residential purposes. Land located at popular areas for closeness of schools, markets, offices will be more valuable than slum areas due to existence of factories, burning ghats, bustees, etc. (th Stee : The size of a plot plays an important role'on its value. Small plots ‘are sold at a higher rate than bigger plots. (tit) Shape : It is obvious that plots of land with regular shapes will be sold at a higher price than those with irregular shapes. ‘There Is) however, no hard and fast rule which connects the value of land with shape and depending upon the merits of each case, the valuer makes suitable allowance for this aspect of land. More the irregularity in sbape more ia the reduction of cost 2023.10.644 Engineering Economies, Estimation and costing] Rear width emer be feor with Gomukhi re Vyaghramukhi plot Frontage Frontage =— Rood Road _——~ — Read _——— ———_Rroad_——— FIG. 1 SHAPE OF PLOT be few and consequently, the prices of such plots will be low as compared to thase of Gomukhi plots, (iv) Frontage and depth : A corner plot having roads on two sides known as ‘return frontage’ will be valued more than normal plot having the Same area with front Toad only, (v) Front road width estimating the value of a plot residential areas the width of front of a plot of land must be According to municipal law the height of & building depends mostly on front road width. For costly lands there for construction of multi- + During of land for roadway in considered,ting is chi les vill [Valuation Road Plot with| vista FIG. 3 (vi) Vistas : When there is a second road joining the first road at the front of a plot of land then it is said to have a ‘vista’ Due to uninterrupted view and increased natural ventilation, the land having a vista is valued more than the adjoining lands. (vil) Nature of soil : Lands of filled up areas have a lesser safe bearing capacity (S.B.C.) than natural ground. The foundation cost for a proposed building will be More if the soil has a lower bearing capacity than the natural land. Naturally, the value of filled up land is less than solid land. (vill) Land - locked land : Land-locked, that is land not having an access to any roadway excepting a passage gained from easement rights, values much less. 2. Hypothetical method In this method, value of a vacant plot of land is estimated by capitalizing the assumed rent that can be obtained from a building, if erected on the land after developing the same and then deducting the cost of development and building. ‘This is not a suitable method of valuation of land, because the cost of land depends on the magnitude of development of land. If the land is not fully developed in the assumption then a little reliance can be placed on this method. 2023.10.(o6 Engineering Economies, Estimation and costing Valuation Procedure : (i) From the total area of land find out the permissible covered area. 1 5 Permissible covered area = Total area - 3 x area of land as required for open space. (ii) Find, rentable area = Total covered area - 20% for area of walls and wastes. (ii) Calculate, net rent per month = Gross rent - outgoings. (@ 30% of gross rent) (iv) Find out Y.P. since land (perpetual) with interest on capital at the current bank deposit rate (mini, 10%) and for redemption of capital (Say 6%) (“) Capitalize the net rent by multiplying the Y.P. deferred for the development and construction period. (vi) Find out the cost of the building from the total covered area and current plinth area rate. (vii) Workout the development cost of the land, (ili) Find the total cost of building and development cost of land. (x) Deduct the total cost of building and development from the deferred rental value of the building to find the cost of land, 3. Belting Method : increases, The main problem facing the valuer while adopting this method is to decide the depth up to which the maximum land value extend and from that point onwards it starts declining, The next step would be to fix the relationship regarding the value of back land to the front land, The entire plot is divided into a number of convenient strips by lines parallel to the centre line of the road. Each strip of land is known 2023.10.23 17:42023.10.23 17:46Engineering Economics, Estimation and costing | (Gs EXAMPLES Example-1 : Figure shows the plot of land. If width of first belt is 30 m anq its value is estimated to Rs. 100/m?. Find value of the entire plot, by belting method, | Vj, Va) Vg are the values and B,, By, By are widths. B, = Remaining 1.5 B, Solution : Let us divide the plot in 6 parts, Width of first belt B, = 30 m Width of second belt By = 1.5 x 30 = 45 m ~ | Width of third belt By = 125 - 30 - 45 = 50 m Now, we will decide the sizes of parts 4, 5, 6, By similar triangles imilarly, BB, 40 an 30” 125 =e 2 30” 125 7% ~ BB, = 9.6 m 0; Banton 2023.10.23 17:46 —_—Smemmmrnmesee2023.10.23 17:46_- Engineering Economies, Estimation and costing) (ii) Municipal taxes @ 10% of gross annual rent (iii) Rent for land-lease Rs. 300 per year (iv) Water supply and sanitary charges Rs. 100 per year | (v) Maintenance cost Rs. 200 per year (vi) Future life of building = 70 years: (vii) Remaining period of lease 60 years. | (viii) Rate of interest on S.F. @ 4%. (ix) Rate of interest on principal @ 8% At what reasonable price, you will advise your client to purchase the property ? Solution : | ‘Total annual income : = 400 x 12 = Rs. 4800 | Outgoings = Rs. (1) Municipal taxes 10% = 0.1 x 4800 = 480.00 | (2) Water supply and sanitary charges = 100.00 (3) Rent for land lease = 300.00 | (4) Maintenance cost = 200.00 total Rs. 1080.00 Net annual income = gross income - total outgoings N.L. = 4800 - 1080 = 3720 Rs. | Remaining period of lease = 60 years i= 0.08 i, = 0.04 TP. ane i | (1+i,)"=1 | 1 omrny pe Z (1 + 0,04) -1 * 0.08 +0.0042 = 0.0042 = 11.876 2023.10.23 17:45