Construction of

valuation tables

© University College of Estate Management 2017 P10486

Contents
1 Aims................................................................................................................
2 Learning outcomes........................................................................................
3 Introduction....................................................................................................
4 Compound interest........................................................................................
4.1 Simple interest.................................................................................................
4.2 Compound interest...........................................................................................
4.3 The rate of interest...........................................................................................
4.4 Compounding and discounting........................................................................
5 Construction of the valuation tables (excluding tax tables).....................
5.1 The Amount of £1 table....................................................................................
5.2 The Present Value of £1 table.........................................................................
5.3 The Present Value of £1 p.a. or Years’ Purchase table, single rate...............
5.4 The Present Value of £1 p.a. or Years’ Purchase table, dual rate................
5.5 The Amount of £1 p.a. table..........................................................................
5.6 The Annual Sinking Fund table......................................................................
6 Terms and conditions of use......................................................................
1 Aims
Valuation tables are a fundamental part of your studies and it is vital that you
understand the formulae and when to apply the tables. This paper deals with
the construction of valuation tables, as calculated on an ‘annually in arrears’
basis.
The role of the tables in valuation is not described in this paper. The current
paper is concerned with various financial calculations which can be applied in
any investment situation, including property valuation.

2 Learning outcomes
After studying this paper you should be able to:
 Make the various calculations using the given formulae.
 Show the interrelationship of the tables.
 Describe the function of each table and when to apply each table in
practice.

3 Introduction
The valuation tables merely express formulae, which could be found with a
financial or scientific calculator, and a knowledge of principles. However, you
will find tables more convenient to use for problem solving. This paper deals
primarily with the construction of the tables. At the heart of the matter is
compound interest, and this is considered first.
Throughout this paper, calculations are based on the assumption of income
being received yearly in arrear.

4 Compound interest
In most societies the payment of interest for the use of capital is an established
part of economic life. In financial practice, the term ‘interest’ may have various
meanings and that in any given circumstance it is obviously important to be
certain as to the meaning which is being attached to the term.

4.1 Simple interest

Basically, interest may be treated as being either simple or compound. Simple
interest arises when only the original capital earns interest. For instance, A
might lend £100 to B at five percent per annum. If B pays A £5 at the end of the
first year he will have discharged the obligation to pay the interest. A similar
payment of £5 at the end of each year while the loan is outstanding would also
meet the definition of simple interest, since in each case interest is being paid
only on the original E capital.

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4.2 Compound interest
Interest may accrue on interest as well as on capital. For instance, X lends Y
£100 to be repaid in two years at five percent per annum and arranges that the
interest due on the loan will be repaid, not at the end of each year, but as a
single sum at the time when the capital is due to be repaid. In this case the
interest of £5 unpaid at the end of the first year is added to the original loan of
£100 which then becomes £105. To calculate the interest for the second year,
£105 is therefore treated as the amount of the loan. The interest on this sum is
£105 × 5
= £5.25
100
The loan outstanding at this point is £105 + £5.25 = £110.25, and this is the
sum which Y must repay to X at the end of two years. The interest earned by X
is, of course, £110.25 - £100 = £10.25. On a simple interest basis X would have
earned only £10. To summarise, it may be said that the theory of compound
interest is based on the continued growth of a capital sum over a given period
by its ability to attract interest to it over that period.

4.3 The rate of interest

In theory the growth referred to above is a continuous process, which is similar
to the branch of a tree while it is growing. In practice, however, it is convenient
to treat this growth as if it occurs only in stages at stated intervals of time,
instead of continuously, and most financial circles have conventionally adopted
the period of one year as this unit interval of time. This convention is a useful
one, but it has often led to the belief that interest must be associated with a
yearly period. It is important to realise that this is not so and that it is often
convenient to adopt other intervals of time when considering interest
calculations. For example, credit card arrangements add interest monthly at for
example 1.5 percent per month. This aspect will be treated later.
On the basis of the above, the rate of interest may be defined generally as the
amount which will be paid in one unit interval of time for each unit of
capital while it is invested.

4.4 Compounding and discounting

Calculations involving compound interest involve basically one of two
operations. The first operation, termed compounding, is concerned with the
way in which a present sum will grow over a given period of time at a given rate
of interest. The second operation is termed discounting, and is the reverse of
compounding. It is concerned with the way in which a sum which is due in the
future may be discounted to a lesser sum acceptable now, having regard to the
number of years waiting and the given rate of interest. That is, it seeks to
determine the present value of some amount receivable in the future.

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5 Construction of the valuation tables
(excluding tax tables)
There are a number of books of valuation tables appearing under various titles,
but in this paper all page numbers in brackets are from the fourteenth edition of
Parry’s Valuation Tables.
Before considering the valuation tables in detail, it is necessary to emphasise
that they do not form substitutes for the sound judgement and experience of the
valuer. They do not in themselves give the least idea of the value of landed
property. Valuation tables simply consist of ready-worked compound interest
formulae, arranged in convenient tabular form for ready reference; their main
use is to save the valuer’s time in the purely arithmetical part of a valuation.
We shall deal with the tables in the following order:
1. The amount of £1.
2. The present value of £1.
3. The present value of £1 per annum of Years’ Purchase, single rate.
4. The present value of £1 per annum or Years’ Purchase, dual rate.
5. The amount of £1 per annum.
6. The annual sinking fund to produce £1.
7. The annuity which £1 will purchase.
The first of these, the Amount of £1 Table, forms the foundation for the rest of
the tables, and it is therefore desirable to see how it may be derived from first
principles. It is a compounding table.
In the case of the other tables, the rules and formulae may be studied on the
assumption that the ‘amount of £1’ for any number of years is known, or can be
worked out.
In the compilation of each of these tables, it has been assumed that interest on
capital is due once a year, at the end of each year. The refinement to deal with
quarterly incomes is left until later.

5.1 The Amount of £1 table

The figures given in this table (pp. 130) represent the amount to which a sum of
£1 will accumulate if invested at compound interest for periods ranging from
one to one hundred years at rates of interest from one percent to twenty-five
percent, assuming that the investment of £1 is made now.
In order to see clearly how these figures are obtained, consider the following
example.

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Suppose I place a sum of £1 on deposit at my bank and my banker agrees to
allow me interest on the deposited sum at the rate of, say, two percent per
annum compound interest. At the end of the first year I will have £0.02 of
interest credited to my account, making a total deposit of £1.02. At the end of
the second year my banker will add interest at two percent on £1.02 because,
during that second year, he has been in possession of a loan from me of £1.02
instead of £1, as in the first year. The actual amount which will stand to my
credit at the end of the second year will then be £1.0404. At the end of the third
year it will be £1.061208, and at the end of the fourth year it will be
£1.08243216. These figures are obtained as follows, and the stages may be
followed in the summary outlined below.
 Firstly, determine in decimals of a pound what the interest will amount to
upon £1 for one year. Call this ‘i’ (see below).
 Secondly, add this interest to the £1 deposited. The result is (1 + i), and
this is the amount to which £1 will accumulate at the end of the first year.
It is also the amount at the start of the second year.
 To find the second year’s interest, multiply the amount at the start of the
second year by ‘i’. To determine the amount accumulated at the end of
the second year, add this interest to the accumulated amount at the start
of the second year. This operation is continued for any number of years,
and it is in this way that all tables representing the amount of £1 are
prepared.
Note: In this formula and those which follow, ‘i’ (or interest on £1 for one year)
is expressed in decimal form instead of the more conventional percentage:
2
Interest on £1 for 1 year at 2% = = 0.02
100
4.5
Interest on £1 for 1 year at 4.5% = = 0.045
100
It will be noticed that in each case the figure can be obtained by writing down
the rate percent and then moving the decimal point two places to the left.
The method outlined above for calculating the amount of £1 is suitable for
compiling a set of compound interest tables, but it would be very laborious
when applied to the calculation of compound interest over a considerable
number of years. The following summary shows how the calculation may be set
out and reduced to a formula.

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 Summary of stages in calculating (1 + i)n

Amount at start of + Interest = Accumulated amount at end of

year year
First year 1 + i = (1 + i)
Second (1 + i) + (1 + i)×I = (1 + i) + (1 + i)i
year
= 1 + i + i + i²
= 1 +2i + i²
= (1+i)²
Third year 1 + 2i + + (1 + 2i + i²)I = (1 + 2i + i²) + (1 + 2i + i²)i
i²
= 1 + 2i + i² + i+ 2i² + i³
= 1 + 3i + 3i² + i³=(1+i)³
5.1.1 Formula
We may safely assume from the above reasoning that if ‘n’ is the number of
years during which compound interest will be accumulating:
The amount of £1 at the end of ‘n’ years = (1 + i)n
(The interest earned during n periods of waiting is, of course, (1 + i) n -
1, where 1 is the principal sum.)
The above shows that the figures representing (1 + i) must be raised to that
power represented by the letter ‘n’ or, in other words, it must be put down in a
multiplication sum ‘n’ times. If the number of years is four, and the rate two
percent, then the amount of £1 in four years is (1 + i) 4 or (1.02)4, or 1.02 × 1.02
× 1.02 × 1.02 = 1.08243216.
Note that (1 + i)² = (1 + i) ×(1 + i) and that (1 + i)³ = (1 + i)² × (1 + i)

5.1.2 The use of the Amount of £1 table

The principal use of this table to valuers is that it forms the basis for all the
other tables. In addition, however, valuers may occasionally be called upon to
use it, as the following will show.
Example 1
An investor pays £5,000 for an area of land and leaves it untenanted
and lying waste for five years. What will be the equivalent cost of the
land to him or her at the end of that period, assuming that the investment
was a 5.5 percent one?

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 Total equivalent cost of land after five years:

Purchase price £5,000

Amount of £1 in 5 years @ 5.5% 1.307
(p.96)
Total equivalent cost £6,535

The assumption here is that if the investor had not purchased the land, he
would have had his capital invested elsewhere earning interest, and since he
has not been using that interest, even that might have been put back with the
capital to acquire still more interest. That is to say, the investor had had to give
up £5,000 in cash and £1,535 in loss of compound interest which he might
otherwise have enjoyed. At the end of five years the real cost of the land to the
investor is £6,535 if it is lying waste.
It may be argued that in order to purchase the land, the investor drew money
from his bank and so is losing compound interest at a lower rate than 5.5
percent if his bank does pay a rate lower than 5.5 percent. The answer to this is
that for five years he has had his money invested in property which he
considered, owing to the risks involved, should yield 5.5 percent, and he quite
correctly assesses the lost compound interest at that rate and not at the rate of
interest the bank or his previous investments were paying him.
In stating rules and formulae for the purpose of working out other tables of
compound interest, we shall assume that the amount of £1 at the given rate
percent, and for the given number of years, is already known, or can be worked
out, and we shall refer to this amount as ‘A’:
Amount of £1 = A =(1 + i)n

5.2 The Present Value of £1 table

A far more useful table to the valuer is that described as the ‘Present Value of
£1’ given on pp. 94. This, like the last, is a purely compound interest table.
However, in the Present Value of £1 table the investor is seeking to find what
sum he must put into the bank now in order that it may amount to £1 at the end
of a given period when compound interest has accrued to it. In other words the
table is a discounting one.
Example 2
An investor has been given the option to purchase an area of land
which, it is estimated, will be worth £6,535 in five years’ time. It is,
however, at present unoccupied, and it is anticipated that no use
whatever can be made of the land until five years hence.
If the investor puts down the purchase money at once, how much should
he be expected to pay, assuming that the investment, as before, is a 5.5
percent one?

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 Estimated value in 5 years £6,535
Present value of £1 in 5 years @ 5.5% (p 0.7651344
62)
Price investor should pay now £5,000

The PV of £1 is carried out to seven places of decimals, but two significant

figures will be sufficient for examination work. The present value of £1 is
referred to as V or PV.

5.2.1 Formula
It will be seen that Example 2 is the reciprocal of Example 1, and it will follow
that the two tables are reciprocal also, that is to say:
1 1
Present value of £1 = or =V
Amount of £1 A
Substituting in the formula for A given above,
1
V = Present value of £1 = n
(1+ i)
Alternatively V + compound interest on V for n years @ i% = 1 where V is the
sum to be paid for a future income of £1 in n years.
1
∴ V(1 + i)n = 1; V =
(1+i)n

5.3 The Present Value of £1 p.a. or Years’ Purchase

table, single rate
The Present Value of £1 table gives the immediate value of a single sum of £1
to be received after a stated number of years, but the Present Value of £1 p.a.
table gives the immediate or capital value of a series of such sums. The table is
alternatively described as a table of years’ purchase and is used for valuing
incomes receivable for any stated number of years (see pp.39—51).

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 Example 3
An investor is entitled to receive £1,000 at the end of each year for the
next three years. Assuming a rate of 10 percent per annum, calculate
the sum which he should offer now in exchange for these receipts.
Referring to the formula for the present value of £1, we can calculate
what sum the investor should give now for each future sum of £1000, by
multiplying each £1,000 by the present value of £1 having regard to the
time of the receipt of each future sum. Thus:

£1,000 × 0.90909 = £909.09

£1,000 × 0.82644 = £826.44
£1,000 × 0.75131 = £751.31
£2,486.84

The sum to be paid now for £1,000 p.a. for three years = £2,486.84. But
using the tables at p.34 we have:

Income £1,000
YP 3 years @ 10%. 2.4869
£2,486.90

The concept that the present value of £1 p.a., or years’ purchase as it is

sometimes called, is found from the summation of each present value is a
fundamental one.
It is particularly important when the sum receivable in each year varies. In the
case of property the rent is often fixed, either in perpetuity or for a given
number of years, and this fact allows the tedious process of summing each
year’s income, as shown above, to be replaced by the calculation using the
present value of £1 per annum as found from a formula.

5.3.1 YP formula
The formula for the years’ purchase for a limited term may be found in one of
two ways:
 from the summation of present values
 from the sinking fund concept.
5.3.2 Years’ purchase (single rate) as the summation of present values
The present value of an income of £1 p.a. is the present value of £1 in one
year, plus the present value of £1 in two years and so on. To find, for example,
the present value of £1 p.a. in three years we have:
1 1 1
+ +
(1 + i) (1 + i) 2
(1 + i)3

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 The sum of this series is:
1
1- 3
(1 + i)
i
Thus the formula for the present value of £1 p.a. becomes
1-V
YP (single rate) =
i

where V is the present value of the last instalment of income (1(1 + i) )

n

5.3.3 Years’ purchase (single rate) from the sinking fund theory
The income is made up of two parts, i.e. interest on capital expended and
replacement of capital expended. It follows from this that:
1
Years’ purchase =
i+SF
where SF is the annual sinking fund to replace each £1 of expenditure over the
period of the income at i%.
There are therefore two alternative formulae in the case of YP single rate, each
of which gives the same result.
Example 4
Find the years’ purchase for three years at 10 percent
1-V
a YP =
i

=
1-
(1(1+i) )
3

i
1-0.7513
=
0.10
= 2.487
1
b YP =
i+SF
1
=
0.1+0.3021148*
1
=
0.4021148

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 = 2.48685
∗The figure of 0.3021148 is taken from the sinking fund tables atp.122.

5.4 The Present Value of £1 p.a. or Years’ Purchase

table, dual rate
5.4.1 Remunerative and accumulative rates
 In the single rate tables the rate used to calculate the annual sinking
fund is the same as the rate of return required from the investment.
When these two rates are the same, the years’ purchase formula is
said to be on a single rate basis.
 In some cases, notably leasehold interests, the investment may be
undertaken on the basis that the rate of return applicable to the
sinking fund is not the same as the rate of return applicable to
the investment. A years’ purchase formula on this principle is said
to be on the dual rate basis (pp.53—71).
 On the dual rate basis the rate applicable to the sinking fund is
usually less than the rate applicable to the investment, and the
sinking fund rate is referred to as the accumulative rate. The rate
provided by the investment is referred to as the remunerative rate.
1
 The formula is a general formula, and applies whether the
i+SF
single rate or the dual rate is used.
Example 5
An investor is entitled to receive an income of £1,000 per annum for three
years. He requires a remunerative rate of return of 10 percent per annum
and considers that he could set up a sinking fund at 3 percent per annum
to replace his capital. Calculate the years’ purchase applicable to this
requirement and value the income which he is entitled to receive.
In this case the investor is working on the dual rate principle and the
years’ purchase must be found from the general formula of YP
1
=
i+SF
1. The first stage is to find the annual sinking fund for 3 years at 3
percent. This may be done by using the formula given for the
calculation of the annual sinking fund (below), or it may be taken
from the valuation tables (p.114), where it is shown to be
0.3235304.
1
2. YP dual rate = = 2.3611
0.1+ 0.3235304
Valuation: Income = £1,000 p.a.

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 Years’ purchase income
3 years @ 10% and 3% = 2.3611
Capital value = £2,361.10
(It may be noted that for any given period and remunerative rate of return,
the years’ purchase on the dual rate basis will always be less than the
years’ purchase on the single rate basis.)

5.5 The Amount of £1 p.a. table

The Amount of £1 table was shown to consist of a single deposit of £1 of capital
invested now with compound interest upon it for a given number of years. In the
case of the Amount of £1 p.a. table (pp.141—156), a fresh deposit of £1 is
assumed to be invested annually, and the accumulation of capital and
compound interest is therefore much more rapid. The table is a compounding
one, and the first deposit of £1 is assumed to be made at the end of the first
year, and not now.
The amount of £1 p.a. is, therefore, that sum to which a series of investments
of £1, made at the end of each of a given number of years, will accumulate at
compound interest.
Example 6
What is the amount of £1 p.a. for four years at 2 percent per annum
compound interest? The sum will consist of the various instalments or
payments and the interest earned on each.
Answer (a)

Amount of £1 invested at the end of the last year of = 1

term
Amount of £1 invested at the end of last year but one = 1.02
of term (earning interest for one year only)
Amount of £1 invested at the end of last year but two of = 1.0404
term
Amount of £1 invested at the end of last year but three = 1.061208
of term
Amount of £1 per annum for four years 4.121608

Note: The instalments are taken for convenience from the end of the term
instead of from the beginning. As the payments are handed over to the bank at
the end of each year, the last instalment is paid in and drawn out again before it
has had time to earn any interest. The remainder of the calculation is simple
and is performed as for calculating (1 + i)n.

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5.5.1 Formula
The formula for the amount of £1 p.a. saves the labour of finding each (1 + i) n
and adding up as shown above. The formula is as follows:
Let ‘A’ equal the amount of £1 in the given number of years.
Let ‘i’ equal the interest on £1 for one year.
A-1
The amount of £1 p.a. =
i
Proof of this and other formulae may be found in Modern Methods of Valuation
by Eric Shapiro, David Mackmin and Gary Sams, published by the Estates
Gazette, but you are not required to prove formulae.
Using the above formula we get an alternative method of answering Example 6.
Example 6
Answer (b)

Let A (as found previously) = 1.08243216

Let i (as found previously) = 0.02
Then: amount of £1 p.a. = A-1
i
= 1.08243216 - 1 0.08243216
=
0.02 0.02
= 4.121608

This table is valuable to landowners who have property entailing regular annual
expenditure for a period without any productive return until the end of the
period. Mining undertakings or timber plantations occasionally provide such
conditions.
Example 7
Owing to unfavourable conditions a small mining concern had to shut
down for five years. As a safeguard to the property, certain pumping
operations had to be carried out during the whole term at an annual cost
of £500. What is the cost of the pumping operation at the end of the 5
years, if compound interest is allowed for at 5 percent per annum?

Annual expenditure on pumping £500

Amount of £1 per annum for 5 years @ 5% 5.526
Accumulated cost with compound interest 5% £2,763

Another use to which this table may be put is the checking of calculations
involving sinking funds as shown in Example 8.

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5.6 The Annual Sinking Fund table
This table (pp.111—122) will be found, on close examination, to be related to
the Amount of £1 p.a. table, as it is also a compounding table. In both tables, a
small annual sum is invested at the end of every year, and allowed to
accumulate at compound interest over a given number of years. In the Amount
of £1 p.a. table, a payment of £1 per annum is made and the accumulated sum
is often a very large one.
In the Annual Sinking Fund table, however, the figures show the annual
payments which must be invested over the required period to accumulate at
compound interest to £1; the annual payments are correspondingly small, and
are assumed to be made at the end of the year.

5.6.1 Formula
The Annual Sinking Fund table is the reciprocal of the amount of £1 p.a.
1
Annual sinking fund =
Amount of £1 p.a.

Inverting the formula for the amount of £1 per annum:

i
i
Annual sinking fund to produce £1 =
A- 1
The sinking fund table might have been omitted from the book of tables, for the
Amount of £1 p.a. table, used as a divisor, gives exactly the same result as the
figure from the sinking fund table used as a multiplier. The latter, however, is
used so frequently by the valuer to calculate annual sums necessary for the
replacement of capital in investments with limited lives that both tables are
printed.
The next example in the form of an exercise shows the reciprocal action of
these two tables.

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 Example 8
Calculate the annual sinking fund at 2.5 percent net to replace£1,000 of
capital at the end of ten years. When found, use the Amount of £1 p.a.
table to prove that the calculation is correct.

Capital sum to be replaced £1,000

Annual sinking fund to replace £1 in 10 years @ 2.5%
(see p.114)
Amount of annual sinking fund £

Check
Annual sinking fund payment
Amount of £1 p.a. in 10 years @ 2.5% (see p.144)
Capital sum replaced in 10 years @ 2.5% £

Example 9
This example will introduce problems involved in deriving one table from
another; such are common in examinations.
Calculate the sinking fund necessary to produce £1 at the end of 21
years at 2.25 percent using:
a. the Amount of £1 p.a. table
b. the Amount of £1 table.
Answer (a)
1 1 ❑
Annual sinking fund = = =
Amount of £1 p.a. ❑ ❑
Answer (b)
1
Annual sinking fund = = = =
A-1

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6 Terms and conditions of use
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