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    I. Rental Method of Valuation: Capitalized Value Net Rent Year's Purchase

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    bhushruti
    The document discusses two methods of property valuation: 1. Rental method values a property based on its net rental income. Net rent is calculated by deducting expenses from gross rent. Net rent is then multiplied by the year's purchase rate to determine capitalized value. 2. Profit-based method values properties that generate profit, like cinemas or malls. Net profit is calculated by deducting expenses from gross income. Net profit is then multiplied by the year's purchase rate to determine capitalized value. An example shows calculating the capitalized value of a cinema hall using the profit-based method, accounting for expenses like taxes, maintenance, sinking fund, insurance, and repairs to determine

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    I. Rental Method of Valuation: Capitalized Value Net Rent Year's Purchase

    Uploaded by

    bhushruti
    176 views3 pages
    The document discusses two methods of property valuation: 1. Rental method values a property based on its net rental income. Net rent is calculated by deducting expenses from gross rent. Net rent is then multiplied by the year's purchase rate to determine capitalized value. 2. Profit-based method values properties that generate profit, like cinemas or malls. Net profit is calculated by deducting expenses from gross income. Net profit is then multiplied by the year's purchase rate to determine capitalized value. An example shows calculating the capitalized value of a cinema hall using the profit-based method, accounting for expenses like taxes, maintenance, sinking fund, insurance, and repairs to determine

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    The document discusses two methods of property valuation: 1. Rental method values a property based on its net rental income. Net rent is calculated by deducting expenses from gross rent. Net rent is then multiplied by the year's purchase rate to determine capitalized value. 2. Profit-based method values properties that generate profit, like cinemas or malls. Net profit is calculated by deducting expenses from gross income. Net profit is then multiplied by the year's purchase rate to determine capitalized value. An example shows calculating the capitalized value of a cinema hall using the profit-based method, accounting for expenses like taxes, maintenance, sinking fund, insurance, and repairs to determine

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    176 views3 pages

    I. Rental Method of Valuation: Capitalized Value Net Rent Year's Purchase

    Uploaded by

    bhushruti
    The document discusses two methods of property valuation: 1. Rental method values a property based on its net rental income. Net rent is calculated by deducting expenses from gross rent. Net rent is then multiplied by the year's purchase rate to determine capitalized value. 2. Profit-based method values properties that generate profit, like cinemas or malls. Net profit is calculated by deducting expenses from gross income. Net profit is then multiplied by the year's purchase rate to determine capitalized value. An example shows calculating the capitalized value of a cinema hall using the profit-based method, accounting for expenses like taxes, maintenance, sinking fund, insurance, and repairs to determine

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 3

    I.

    Rental Method of Valuation

    Rental method of valuation is the type of valuation mostly used for fixing up the taxes. In
    this method, the net rental income is calculated by deducting all the expenses from the
    gross rent and the obtained net rent is then multiplied with the year's purchase to obtain
    the value of the property. The general formula used is,

    Capitalized value= Net rent * Year's Purchase

    Where, Net rent = Gross rent-outgoings

    Example:

    The gross rent according to a property is Rs. 20,000/- p.a. Allowing 10% as
    deductions for repair and maintenance of the property. Determine the rental
    value of the property at an interest of 10%.

    Solution,

    Gross rent collected p.a. = Rs. 20,000/

    Expense = 10% of the gross rent collected (Since, 10% of the rent is used in
    repair & maintenance) = 10% of 20,000 = Rs. 2,000

    Hence, the net rent collected p.a. = Rs. 20,000 - Rs. 2,000 = Rs. 18,000

    Now,

    Year's Purchase = 100/10=10 (Considering year's purchase for a long time)

    Thus,

    Capitalized Value = Net rent * Year's purchase = Rs. 18,000 * 10 = Rs. 1, 80,
    000

    II. Profit Based Method of Valuation

    Profit based method of valuation is similar to the rental method of valuation. It is a widely used
    method for valuation of profitbased properties such as cinema halls, shopping malls etc. In this
    method, the net profit is first calculated after deducting all the expenses which are then
    multiplied with the year's purchase to obtain the capitalized value.

    Example: Determine the valuation of a cinema house if the cost of land is Rs.
    1,20,000. Gross income per year is Rs. 7,50,000. Expenses required per year
    include: a) Taxes and charges are 30% of gross income. b) Repair and
    maintenance cost is 5% of the capital cost of Rs. 9,50,000. c) Sinking fund as in
    25 years at 4% after allowing 10% scrap value. d) The insurance premium is Rs.
    10,000 per year. Assume year's purchase for 60 years at 8% and redemption
    capital at 4%, annual repair of the house at 2% on gross income.

    Solution, Gross income per year = Rs. 7,50,000

    a) Taxes and charges = 30% of gross income = 30% of 7,50,000 =


    Rs. 2,25,000
    b) Repair and maintenance charge= 5% of Rs. 9,50,000 = Rs. 47,500

    c) Fund after 10 % Scarp value = Rs. 9,50,000 * 9/10 = Rs. 8,55,000

    Sinking fund coefficient = 0.047 {((1+0.04) ^25) -1}= 0.24


    Hence, Sinking fund = Rs. 8,55,000 * 0.024 = Rs. 20,520

    d) Insurance premium per year= Rs. 10,000

    e) The yearly charge for annual repair = 2% of gross income = Rs. 15,000

    Hence, total expenses = Rs. 3,18,000 (obtained by adding each expense)

    Net income = Gross income - expenses = Rs. 7,50,000 - Rs. 3,18,020 = Rs. 4,31,980

    Now,

    year's purchase = 1/ (R + Sc)

    Where,

    R = 8% = 0.08 Coeffecient of sinking fund (Sc) = 0.047{[( 1+0.04) ^60)-1} = 0.0042

    Hence,

    year's purchase = 1/(R + SC ) = 11.88

    Capital value = Rs. 4,31,980 * 11.88 = Rs. 51,31,922 Value of building = Rs.
    51,31,922 + Rs. 1,20,000 = Rs. 52,51,922

    Note: Formulas used

    • In case of life of property is anticipated to be short

    and to account the accumulation of sinking fund and interest on income of the property
    to replace
    capital, the year's Purchase is suitably reduced. - Years Purchase (Y.P) = 1/
    (R+S)

    Example: Calculate the value of years purchase for a

    property if its life is 20 yrs and the rate of interest

    is 5%. For sinking fund the rate of interest is 4.5%

    Soln:

    Here, R=5%, R1 = 4.5%

    Y.P =1/(R+S)

    Coeff. Of sinking fund (Sc)=R1/((1+R1)n-1)=0.0319

    Y.P=1/(0.05+0.319)=12.21

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