Professional Documents
Culture Documents
October 2019
CONTENTS
PROJECT VALUATION
Introduction
Object of Valuation
Types of Valuation
Method of Valuation
5. PROJECT VALUATION
5.1. Introduction
Individuals universally exercise daily the art of valuation without
following factors:
Value depends on place, time, circumstances and purpose
Economic solicitations such as depressions and boom
Supply and demand
Essential Qualification for Value: In order that a commodity can
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5. PROJECT VALUATION
5.2. Various Definitions of Value
Market Value: Market value is the value established in a public
forced to sell the property due to the urgent and absolute necessity.
Reversionary Value: It is the value of an asset to the owner after the
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5. PROJECT VALUATION
5.2. Various Definitions of Value Cont.
Potential Value: It is the value an asset could fetch if sold in open
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5. PROJECT VALUATION
5.3. Essential Characteristics of Market Value
The essential characteristic for any asset for market value are;
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5. PROJECT VALUATION
5.4. Essential Requirements for Valuer
The essential requirements for a genuine valuer are:
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5. PROJECT VALUATION
5.5. Object of Valuation cont.
The main objects of valuation are:
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5. PROJECT VALUATION
5.6. Factors Affecting Value of an Asset
The value of an asset depends on many factors:
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5. PROJECT VALUATION
5.7. Types of Valuation
There are various types of valuation;
1. Ordinary Valuation
In ordinary exchange of property; the value is determined by the
judgment of the seller and the buyer, each taking into account the
knowledge of the property, the prevailing exchange conditions, etc.
2. Formal Valuation
In formal valuation of property, the value is determined by judgment of
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5. PROJECT VALUATION
5.8. Method of Valuation
The methods available to evaluate many property are given below.
i. Valuation from life i.e. present book value.
ii. Rental method of valuation
iii. Land and building method
iv. Evidence method based on comparison tendencies also called
comparable sales method.
v. Reproduction cost method
vi. Global valuation method
vii. Break up value method
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5. PROJECT VALUATION
5.8. Method of Valuation Cont…
A valuer prior to valuing any property must examine and collect the
following details:
Location of property with reference to road width, its frontage etc.
Shape and size of property.
Whether owned by singly or co-owner property particularly the
plot.
Whether it’s lease hold or free hold.
Restrictions of local bylaws for leasehold converted to free hold.
Permissible maximum construction thereon.
Whether it’s commercial, residential or industrial.
Restriction of sale or lease deed if any.
Land rates fixed by authorities.
Whether earlier registered documents contain provision for grant
of sale permissible prior to sale.
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5. PROJECT VALUATION
5.8. Method of Valuation Cont…
A valuer prior to valuing any property must examine and collect the
following details:
Sale transactions for that particular type of land during the years
to arrive to some realistic value.
Whether any easement right exists. (Legal right to given to
another party, other than the owner, to gain access to that
property).
Probable future development of that locality under consideration.
Any other information available regarding the land such as filled
up land, logged land etc. regarding the building its year of
construction, future expected life, etc.
Whether all the taxes are paid till the date of valuation.
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5. PROJECT VALUATION
5.8. Method of Valuation Cont…
1. Valuation from Life
This method is generally used for equipments but also used for
buildings in general.
In this method depreciated value of asset is calculated assuming that
performs useful work its wear and tear is bound to occur. This can be
minimized up to some extent by proper care and maintenance but
can’t be totally prevented.
Obsolescence. is the depreciation of existing machinery or asset due
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5. PROJECT VALUATION
5.8. Method of Valuation Cont…
1. Valuation from Life
Methods of Depreciation Calculation: The following are the
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5. PROJECT VALUATION
5.8. Method of Valuation Cont…
1. Valuation from Life
Straight Line Method
This method assumes that the loss of value of machine is directly
proportional to its age. It means one should deduct the scrap value
from the original value and divide the remaining value by the
number of years of useful life.
Let C be the Initial cost of a machine.
S be the scrap value.
N be the Number of years of life of machine. and
D be the depreciation amount per year.
CS
Then, D Birr
N
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5. PROJECT VALUATION
5.8. Method of Valuation Cont…
1. Valuation from Life
Straight Line Method
Example-1
(a) A machine was purchased for Birr 450,000 on 1st January, 1991,
the erection and installation work costs Birr 70,000. This was replaced
by a new one on 31st Dec, 2010. If the scrap value was estimated as
Birr 150,000 what should be the rate of depreciation and depreciation
fund on 15th June, 2000?
(b) If after 12 years of running, some assemblies are replaced and the
replacement cost is Birr 150,000 what will be the new rate of
depreciation?
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5. PROJECT VALUATION
5.8. Method of Valuation Cont…
1. Valuation from Life
Straight Line Method
Solution
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5. PROJECT VALUATION
5.8. Method of Valuation Cont…
1. Valuation from Life
Straight Line Method
Solution
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5. PROJECT VALUATION
5.8. Method of Valuation Cont…
1. Valuation from Life
Straight Line Method
Solution
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5. PROJECT VALUATION
5.8. Method of Valuation Cont…
1. Valuation from Life
Straight Line Method
Example-2
Consider an excavator purchased for 3.1 million birr having a useful
life of 5 yrs. Determine the depreciation and book value for each of
the 5 years using Straight Line method. Assume a salvage value of S
= 860,000 birr.
Solution
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5. PROJECT VALUATION
5.8. Method of Valuation Cont…
1. Valuation from Life
Straight Line Method
Solution
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5. PROJECT VALUATION
5.8. Method of Valuation Cont…
1. Valuation from Life
Diminishing Balance Method
This is also called “Reducing Balance” Method. The diminishing
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5. PROJECT VALUATION
5.8. Method of Valuation Cont…
1. Valuation from Life
Diminishing Balance Method
Example - 3
A lathe is purchased for Birr 800,000 and the assumed life is 10 years
and scrap value Birr 200,000. If the depreciation is charged by
diminishing balance method, calculate the percentage by which value
of the lathe is reduced every year and depreciation fund after 2 years.
Solution
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5. PROJECT VALUATION
5.8. Method of Valuation Cont…
1. Valuation from Life
Diminishing Balance Method
Solution
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5. PROJECT VALUATION
5.8. Method of Valuation Cont…
1. Valuation from Life
Diminishing Balance Method
Solution
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5. PROJECT VALUATION
5.8. Method of Valuation Cont…
1. Valuation from Life
Diminishing Balance Method
Solution
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5. PROJECT VALUATION
5.8. Method of Valuation Cont…
2. Rental Method of Valuation (Capitalized Income Method)
This method is used for big premises like flats, hotels, and hostels,
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5. PROJECT VALUATION
5.8. Method of Valuation Cont…
3. Land and Building Method of Valuation.
In this method the valuation of land and part building constructed
over it are made separately and the value of that asset is made by
adding them.
If building does not exist then only land is evaluated.
Some of the points that need to be carefully seen in the valuation are:
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THANK YOU!
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