1.

Valuation Table

Simple interest amount working

To work out gross amount that would accrue at the end of given period of
time,
I=PxRxN
A=P+I
‘I’ is the total interest amount accrued in given period.
‘P’ is the principle amount deposited.
‘R’ is the rate of interest adopted.
‘N’ is the period in number of years.
‘A’ is the Gross Amount including principal sum and total interest.

Example
Mr X deposits sum of Rs.6,000/- at 5% simple interest rate , for 6 years
period. Calculate Gross Amount receivable after 5 years period including total
interest amount at simple interest basis.

Solution:
I=PxRxN
5
= 6000 x x6
100
= Rs.1,800/-
A = P+I
= 6,000 + 1,800
=7,800/-

Compound Interest Amount Working

Would accrue at compound interest rate, after a given period of time
i) Total Interest factor (I) = (1 + r)n
ii) Gross Amount (A) = P x (1 + r)n
‘R’ = Rate of compound interest
‘n’ = number of years
‘P’ = Principal Amount
‘A’ = Gross Amount receivable at end of given period.

Page no 1
Example
Mr. Y. deposits Rs.7,000/- in Bank at 5% compound interest rate for 6 years
period. Calculate gross amount receivable after 6 years period including total
interest amount on compound interest basis.
Solution
= (1 + )
5 6
= 7000 (1 + )
100
= 7000 1.056
= 7000 1.34
= . 9380.6/−

Present Value of a Rupee

 The reverse mathematical process to calculate compound interest
(Also refer Table 2 in Mirams Val. Tables)
Working out present worth of a rupee receivable after certain period at
given rate of compound interest.
1
Present value of a Rupee (PV) =
(1+R)
1
Present worth of amount receivable PVA = c x
(1+R)
‘C’ = Capital sum Receivable at future date.
‘R’ = Rate of interest
‘n’ = number of years.
Example
A peson will receive back leased property worth Rs.15,00,000/- after 15
years. Calculate its present worth by adopting 5% rate of interest.
Solution
Present value of Rs. 15,00,000
1
=cx
(1+R)
1
= 15,00,000 x
(1 + 0.05)15
= 15,00,000 x 0.481
=Rs. 7,21,500 /-

Page no 2
 Example

What is the present value of the investments to receive following amount

of money, at 5% interest rate, at 6 years intervals as given below.
i) After 6 years Rs.15,000
ii) After 12 years Rs.35,000
iii) After 18 years Rs.55,000

Solution

It will be necessary to compute present value in 3 parts as under :-

(i) Present value of Rs. 15,000
1
=cx
(1+R)
1
= 15000 x
(1 + 0.05)6
= 15000 x 0.7462
= 11193/-
(ii) Present value of Rs. 35,000
1
=cx
(1+R)
1
= 35000 x
(1 + 0.05)12
= 35000 x 0.5568
=Rs. 19489.3 /-
(iii) Present value of Rs. 55,000
1
=cx
(1+R)
1
= 55000 x
(1 + 0.05)18
= 55000 x 0.4155
=Rs. 22,852/-

Present value of right to receive sums in 3 stages at 5 years interval

=Rs. 11193/-+ Rs. 19489.3 / + Rs. 22,852/-
=Rs. 53534.3/-

Page no 3
 Amount of Re.1/Annum working
 Like recurring account

. .−1
 = where,
C.I. is compound rate of interest

Many a times valuer is required to work out Gross Amount that would
accumulate after the given period of time,
(1+ ) −1
=
(1 + ) − 1
=
Accumulated sum for Re.1/year (APA)
‘R’ = Rate of Interest
‘n’ = Number of years
‘C’ = Capital Amount received/Year

Example

Mr.A is saving Rs.1,200/- each year and investes this yearly saving each year
at 6% interest for 25 years period. What will be gross capital yield at the end
of 25 years?

(1+ ) −1
=
(1 + 0.06)25 − 1
=
0.06
6.85 − 1
=
0.06
= 54.864
= = 1,200 54.8644 = . 65837.41/−

Page no 4
 Example

From the salary of a person, Rs.1000/- per month is deducted and said sum is
invested in deposit fund scheme annually at 7% interest. Calculate gross
amount accumulated under the scheme after 20 years service. There are no
withdrawals from the fund during this period.
Solution
(1+ ) −1
=
(1 + 0.07)20 − 1
=
0.07
3.869 − 1
=
0.07
= 40.995
= = 1000 12 40.995 = . 4,91,940/−

Annual Sinking Fund Working

 Like EMI calculation
 Inverse of previous ie. Recurring account
 =
. .−1

where, C.I. is compound rate of interest

Fund amount that has to be set aside annually by building owner, at given rate of
interest, for the period which is equal to past age of the building.
ASF =
(1+ ) −1

. .=
(1 + ) − 1

Example

What shall be Gross Sinking Fund required to be set aside every year to
recoup total amount of Rs.8,00,000/- at the end of 60 years life of building at
4% rate of compound interest.

Page no 5
Solution

= (1+ ) −1
0.04
=
(1 + 0.04)60 − 1
0.04
=
10.519 − 1
=0.0042
Gross sinking fund = C x ASF
= 8,00,000 x 0.0042
=Rs. 3360/- per year

If we apply the formula given in previous para 2.30, using 3360/year as

annual saving ,you will notice that this sum of Rs.3360/- per year
accumulates to the gross capital sum of Rs.8,00,000/- at 4% rate of interest
after 60 years period.

Example

A person has to repay loan amount of Rs.8,00,000/- after 20 years. What

amount should that person set aside every month to enable it to repay loan
with 4% interest ?
= (1+ ) −1
0.04
=
(1 + 0.04)20 − 1
0.04
=
2.19 − 1
=0.0336
Gross sinking fund = C x ASF
= 8,00000 x 0.0336
=Rs. 26880/- per year
=2240/-per month

Page no 6
 Present value of an amount of Re.1/year (Single rate basis)
1− . .


Where P.V. is present value i.e inverse of compound rate of interest

o Present worth of future annual income flow for given period of time
o Present market worth of the asset generating such income
o Income flow is normally a perpetual income
o only remunerative rate of interest for the perpetual income as single
rate working

o To separately work out present value of Re.1 receivable after 1st year,
P.V. of Re.1 receivable after 2nd year up to Re.1 receivable after given
number of years and total up all these sum
1
1−( )
(i) Present value of Re.1/year (Y.P.)= (1+ )

(ii) Value of asset = C x Y.P.

Rate of interest = “R”

Numbers of years = “n”
Capital income (Annuity) received each year = “C”
Years Purchase = “Y.P”

Example

A office yields net rental income (Annuity) of Rs.60,000/- per year. If this income
ceases after 40 years (Future life of building), what is present value of this
property at 7% rate of interest.
1
1− )
(
(1 + )
. .=
1
1−( )
(1 + 0.07) 40
. .=
0.07
=13.332
Value of the property = C X YP = 60000 x 13.332 =799920/-

Page no 7
Example

What is the present value of an Annuity which would continue yielding income
of Rs.20,000/month for 15 years period at 6% rate of interest.
1
1−( )
(1 + )
. .=
1
1−( )
(1 + 0.06)15
. .=
0.06
= 9.71
Present Value of the property = 20000 x 12 x 9.71
=23,30,400/-

Present value of an amount of Re.1/year (Duel Rate basis)

 To provide for recoupment of capital sum invested

 Addition to annual yield income from the asset

 One rate is remunerative interest (yield) rate for capital sum invested

 Remunerative interest rate is higher

 Second rate is interest rate for recoupment of capital invested for period
after which annual income is likely to cease

 Recoupment of capital has to be made

 Nothing but to provide for setting aside Sinking Fund amount each year
1
 Present value of Re.1 per year (Y.P.) =
+

Sinking fund (S) =

(1+ ) −1
Value of Asset = c x Y.P.
Remunerative Interest Rate = “R”
Interest rate for recoupment of capital = “r”
Numbers of year = “n”
Capital income received each year = “C”
Years Purchase = “Y.P.”

Page no 8
Example

A person is taking a land on 50 years lease and on the plot he is building a

building yielding net income of Rs. 30,000/year. After 25 years, he decided to
sale the property. Calculate present sell value of the property if expected yield
on investment is 9% and rate of redemption of capital is 4%.

Solution
1
Y. P. =
+
Unexpired lease period 50-25 = 25 years

Sinking fund (S) = (1+ ) −1

0.04
=
(1+0.04)25−1
=0.024
1
Y. P. =
+
Y. P. = 1 = 8.77
0.090+0.024
Present value of the property = 30,000 x 8.77
=2,63,100/-

Example
What is your advice on buying price of fully developed rental property
yielding net rent of Rs.80,000/year. Expected rate of return is 9% and future
life of building is 60 years. Adopt rate of recoupment of capital at 4%.

Solution
1
Y. P. = +
Sinking fund (S) =
(1+ ) −1
0.04
= (1+0.04)60−1
=0.0042
1
Y. P. = +
Y. P. = 1
= 10.615
0.09+0.0042
Present value of the property = 80,000 x 10.615=
=8,49,260/-

Page no 9
  Summery to remember

.1. Simple interest amount working

I=PxRxN
A=P+I
.2. Compound Interest Amount Working

(I) = (1 + r)n
= P x (1 + r)n
.2.1. Present Value of a Rupee
The Inverse of compound interest
1
PV =
(1+R)
.3. Amount of Re.1/Annum working

Like recurring account

. .−1
=
where, C.I. is compound rate of interest
.3.1. Annual Sinking Fund Working
Like EMI calculation Inverse of previous ie. Recurring account
= . .−1
where, C.I. is compound rate of interest
.4. Present value of an amount of Re.1/year (Single rate basis)
1− . .

Where P.V. is present value i.e inverse of compound rate of interest

.5. Present value of an amount of Re.1/year (Duel Rate basis)

1
=
+

Page no 10
 Introduction

 Theory of investment and return on investment in assets like land, land with
building or plant and machinery

 Use of net income and rate of return expected by the asset holder.

 Value’ is not intrinsic to or inherent in any thing,

 ‘Interest’ in a property

 Legal right to Derive Benefits

 No value property as a physical asset (land, brick and mortar etc.)

 Right to Derive benefit

 The form of ‘Income’

Income Approach to Valuation:

 Income from a property

 Net income

 Interest yielded

 In mathematical form, capital value =net income x multiplier y.p.,y.p.

depends on the rate of interest expected to be yielded ,y.p. is the summation
of the present worth of series of income of re.1/-

The Main Steps in Income Capitalisation method :

 To collect data from market and other sources like records of Registrar of
documents

 To inspect property to be valued

 To find out fair and maintainable gross rent receivable

 To deduct various permissible outgoings

 To select proper rate of capitalisation by study of Real Estate Market

 To find out applicability/Non applicability of Rent Control Act

 To capitalize net receivable income

 To deduct for major outstanding liability

Page no 11
 Principle methods :

 Rental Method also known as Yield Method or Return on Investment Method

 Discounted cash flow technique (D.C.F. Method).

 Profit Method also known as Capitalization of earnings method.

Annuity:

 Net Annual Payment

Capitalization:

 Amount required to be invested by a person

Rate of Capitalization :

 An investor is willing to invest

 Remunerative rate of interest

Rate of Redemption of Capital:

 Income is a terminable income

 Accumulative rate of interest

 For recoupment of capital invested

 Short term leases

 Income is terminable

 Recoupment therefore requires highest and assured security

 Recoupment for sinking fund

 Low as 3% to 3-1/2%

 Rate of capitalization of 8% to 9%

Page no 12
Example

A person is leasing his 2,000 sq.mts. land to Lessee in 2015 for 99 years
period on monthly rent of Rs.10,000/month. This lease is renewable for
further 99 years period on same terms. The person constructed a building
and rented 5 nos of flats in 2016 on rental of Rs.15000/month. Repairs and
other outgoings of the property are 30% of house rent income. Calculate
value of Lessor’s interest in land and also calculate value of Lessee’s interest
in the property. Prevalent rate of return in the market is 7%.

Solution

(a) Gross Annual Income of ground rent to Lessor:

Rs.10,000 x 12 = Rs.1,20,000/-per year.

As rate of return is 7%,

Value of Lessor’s interest = Rs. 12,00,000 x 100/7 = Rs. 17,14,285/- (a)

(b) Value of lessee’s interest in property is as under:

Gross Annual House rent income
Rs.15,000 x 12x5 = Rs.9,00,000
Less : Outgoings :
Ground Rent Rs.10,000 x 12 = Rs.1,20,000
Property tax & Repairs
30% of 900000 = Rs.3,00,000
= Rs.4,20,000
Net Annual Return
= 9,00,000-4,20,000 = Rs.5,80,000/ yr.

Subsistence of lease is subjected to compliance of various terms, conditions

and covenants of lease. Hence investment in purchasing Lessee’s interest is
little risky. We should therefore capitalize net yield at 1% higher return say at
8%.

Value of Lessee’s interest in property:

Rs.5,80,000 x 100/8 = Rs.2,66,666/-
Say Rs.72,50,000/- (b)

Page no 13
 Concept of Reversionary Value of Land

 In cases of terminable interest,

 Lessor gives land to lessee for development

 Take back the possession of land in original condition after lease expiry

 Lessor acquires or holds two rights

 First right is to get back his own land on expiry of lease.

 Second right is to get full ownership of building constructed

Example

Mr. X leased 15000 sq.mts. land in 2014 to Lessee for 99 years period by
charging lease rent of Rs.100000/month. Lessee constructed the building
yielding total rent of Rs.55000/month. Lease is renewable for further period of

99 years on same terms. Calculate value of the Lessee’s interest in the property
and also value the Lessor’s interest in property, as on March 2015, if Rent Act is
applicable. Property taxes and other expenses for house are 50% of Gross Rent.
Adopt expected rate of return at 8%.

Solution :

(a) Value of Lessor’s interest = Capitalised value of ground rent income in

perpetuity.
Gross Annual Rental income = Rs. 10000 x 12 = Rs. 12,00,000/-
Value of Lessor’s interest: 1,20,000 x 100/8 = Rs.1,50,00,000/-
SayRs.1,50,00,000/- ... (a)
(b) Value of lessee’s interest = Capitalized value of net house rent income.
Gross Annual house rent income = Rs.55000 x 12 = Rs.6,60,000/-
Less :
Outgoings.
Lease rent/year = Rs.1,20,000/-
Other outgoings 50% of G.Rent.Rs.1,20,000/- = Rs.60,000/-
Net annual income = Rs.6,00,000/-
As Lessees rental income is subjected to risk of irregular rental income and also
risk of likely forfeiture of the lease, 1% higher rate of capitalization is adopted.
Value of Lessee’s interest = 6,00,000 x 100/9 = Rs.66,66,000/- (b)

Example

Mr. B leased 30000 sq.mts. plot to Lessee in 2015 for 99 years period , at lease
Page no 14
rent of Rs.1,50,000/month. No initial premium is taken. Lease is renewable for
99 years further period on same terms. Expected rate of return is 8%. Freehold
land rate in locality is Rs.4,000/sq.mt. and no building is put up on the plot by
the Lessee. Calculate value of Lessor’s interest in land and value of Lessee’s
interest in land as in year 2010.

Solution:

(a) Value of Lessor’s interest

= 1,50,000 x 12 x 100/8
= Rs.2,25,00,000/....... (a)
(b) Value of lessee’s interest
= Freehold value — Value of Lessor’s interest.
= 30,000x4,000 – 2,25,00,000
= Rs. 12,00,00,000 — 2,25,00,000
= Rs.9,75,00,000/.........

Page no 15