IE 307 Engineering Economy 2015-2016; Summer

Valuation of Properties
Engr. Justiniano B. Menes Jr.

Valuation
Valuation is the process of determining the value of certain properties for definite reasons. It is
sometimes called appraisal and the person engaged in the task of valuation is called an appraiser.
In determination of the value of industrial property or equipment, four intagible items are often
encountered:
 Going Value or Going-Concern Value – considered to be an intangible value which an actually
operating concern has due to its operation. It is also considered as the difference between the
value of the property as it stands ready for operation and its value as it would stand at
completion of construction as an inert assembly of physical parts.
 Goodwill Value – element of value which a business has earned through the favourable
consideration and patronage of its customers arising from its well known and well conducted
policies and operation.
 Franchise Value – an intangible item of value arising from the exclusive right of a company to
provide specific product or service in a stated region of the country.
 Organization Cost – amount of money spent in organizing a business and arranging for its
financing and building.

Rate-based Value – value assigned to a property for the purpose of establishing rates. This is usually
applied to public utility companies.

Methods of Valuation or Appraisal

Three commonly used methods of obtaining the value of a property:
1. Historical-Cost Less Depreciation or Present Original Cost Value
In this method, one considers the actual expenses which have been incurred in
constructing the property together with the expenses incurred in maintaining the same in its
present condition.
2. Reproduction-Cosy-New Less Depreciation
In this method, the fictitious equivalent plant or property is assumed to be built under
present prices and conditions using the most efficient methods. The value of the plant by this
method is then its cost when assumed as built at present less the depreciation that appears to
have occurred.
3. Prudent Investment Method
In this method, it is believed, that the owners of the property are entitled only to the
amount that was prudently or wisely spent by the owner’s plant.

Sample Problems:
1. A building was constructed 20 years ago for Php 1,500,000 and is expected to last 40 years with
a scrap value of Php 100,000. Sinkung fund depreciation at 8% is used. If it is built now, the
replacement cost of the building would be greater than the original cost by 4% a year for each of
the 20 years. Determine the value of the building now by:
a. Historical-cost less depreciation method Php 1,252,500
b. Reproduction-cost-new less depreciation Php 2,705,700
IE 307 Engineering Economy 2015-2016; Summer
Valuation of Properties
Engr. Justiniano B. Menes Jr.

2. A manufacturing plant was built 8 years ago at an original cost of Php 350,000 on a 6,000 sq. m.
lot costing Php 15.00 sq. m. The plant is estimated to last 20 years with a salvage value of Php
50,000. The equipment installed 8 years ago cost Php 600,000 and are expected to operate
economically for 15 years with a scrap value of Php 30,000. Five years ago, the company
purchased new equipment to augment the existing ones at a cost of Php 280,000, These will
also last for 15 years with value at that time of Php 28,000. Determine the valuation of the plant
now if depreciation is by sinking fund formula at 9%. Php 989,860

Valuation of Extractive Properties

Extractive properties also known as, wasting assets such as mines, oil and gas wells, timber lands
and quarries. The valuation of the property is defined to be the present worth of all future income from
the property. The annual income from the property consists of two parts:
a. Annual return or dividend
b. Deposit in sinking fund to pay for the investment in the property which may be returned to the
stockholders annually or at the end of operations on the property when the resources are
exhausted.

Using Hoskold’s Formula (used by mining industries):

Let:
P or CO - the investment on the property which will also represent the present
worth of the property
R - annual return to the property, annual gross income minus the annual
operating cost
r - rate of dividend annually on P
i - rate of interest obtainable on the sinking fund
n - number of years the property is estimated to last
SV or CL - salvage value

Annual Dividend on the investment = Pr

Annual deposit in the sinking fund

d = (P – SV)(A/F,i%,n)

Annual Income on the property (R)

R = Pr+ d
R = Pr + (P – SV)(A/F,i%,n) = P(r + (A/F,i%,n)) – SV(A/F,i%,n)
𝐑 𝐒𝐕
𝐏= +
𝐀 𝐅
𝐫 + ( 𝐅 , 𝐢%, 𝐧) 𝐫 (𝐀 , 𝐢%, 𝐧) + 𝟏
IE 307 Engineering Economy 2015-2016; Summer
Valuation of Properties
Engr. Justiniano B. Menes Jr.

Sample Problems:
1. A mine will have a net annual income of Php 400,000 annually for 15 years. Determine the value
if the annual dividend rate is 12%, payable annually and the sinking fund is to accumulate at 7%
annually. Php 2,503,213.11

2. Estimates indicate that a timber tract will yield an annual profit of Php 1,000,000 for 10 years,
after which the timber will be exhausted. The land can thn b sol for Php 120,000. If a prospective
purchaser wishes to earn 12% on his investment and can deposit money in a sinking fund at 6%,
determine the maximum price he should pay for the tract. Php 5,151,961.37

3. An engineer for a mining company is called upon to examine a mining property which is for sale
and to advise his employer regarding its value. He stimates the “ore in sight” to be 440,000 tons
and will base his value on this figure.
The existing facilities will permit the removal of about 55,000 tons of ore per year. He estimates
that the mining, transportation and smelting costs will be total Php 5.75 per ton of ore an that
the gross income per ton mined will be Php 11.75. Administrative expenses will be Php 30,000
per year. What will be the value of the mine to yield at 15% annual return in addition for
reinvestment of earnings at 4% so that the orignila investment will be intact at the end of life of
the mine? Php 1,160,416.58