Scrap value and salvage value

1. VALUATION
Roll no : 41 to 50

2. Differentiate between scrap value and
salvage value
◦ Scrap Value: It is the value of dismantled materials. When the life of a building is over, the
dismantled materialssuch assteel, timber etc will earn a certain amount which is the scrap value
of the building. The scrap value of a building may be 10% of the cost of construction.
◦
◦ Salvage Value: It is the value at the end of the utility period without being dismantled. The sale
value of amachine will be its salvage value (at the end of its period). It does not include the cost
of removal, sale etc.

3. Differentiate between market value and
book value
◦ Market Value: The market value of a property is the amount which can be obtained at any
particular time from the open market if the property is put for sale. The market value will defer
from time to time according to the demand and supply, changes in industry, cost of materials,
labour etc.
◦
◦ Book Value: It is the amount shown in the account book after allowing necessary depreciations.
The book value of a property at a particular year is the original cost minus the amount of
depreciation up to the previous year. The book value depends on the amount of depreciation
allowed per year and will be gradually reduced year to year and at the end of the utility period
of the property the book value will only be the scrap value

4. Differentiate between market value and book value
Market Value Book Value
1. The value is fixed by purchaser 1. Value is fixed by the rate of depreciation
2. The value may be higher during
subsequent years due to increase in
priceindex
2. Value cannot be higher due to increase
ofprice index
3. Value may be constant for a period 3. Value cannot be constant rather there is
agradual fall
4. Market value is considered for valuation 4. Book value is considered for the
accountsbook of a company
5. Depends on the forces of demand and
supply, development of the area
5. Book value is not variable due to
demandand supply and development of
the area

5. Define the following
◦ Rateable Value: It is the net annual letting value of a property, which is obtained after deducting
the amount of yearly repairs from the gross income
◦ Obsolescence: The value of a property or structure becomes less by its becoming out of date in
style , in structure, in design etc and this is termed as obsolescence. The obsolescence may be
due to the reasons such as progress in arts , changes in fashions, changes in planning, new
ideas, new inventions, improvements in design technique etc. Thus even though the property is
physically sound, it may become functionally inadequate and its economical return becomes
less

6. ◦ Annuity: It is the annual periodic payments for repayments of the capital amount invested by a
party. These annual payments are either paid at the end of the year or at the beginning of the
year. If the amount of annuity is paid for a definite number of periods or years, it is known as
annuity certain: If the amount of annuity is paid at the beginning of each period of year and
payments continued for definite number of periods, it is known as annuity due. If the payment
of annuity begins at some future date after a number of years, this is known as deferred annuity.
If the payment of annuity continues for indefinite period, it is known as perpetual annuity

7. ◦ Capital Cost: It is the total cost of construction including land or the original total amount
required to possess a property.
◦ Capitalized value: It is the amount of money whose annual interest at the highest rate of interest
will be equal to the net income from the property. It is the assessment of value of an asset based
on the total income expected to be realized over its economic life. It is the current value of an
asset based on the total income expected to be realized over its economic life span. The
anticipated earnings are discounted so they take into account the time value of money

8. What is meant by Year’s purchase
◦ Year’s Purchase(YP)- It is the capital sum required to be invested in order to receive an annuity
of Re.1 at certain rate of interest. To get Rs 1 per year, it will be required to deposit ¼ of Rs 100
=Rs 25. Thus Year’s Purchase =100/Rate of interest= 1/i
◦ Where i=rate of interest in decimal
◦ N case of a property whose period of utility is limited to a number of years a certain amount is
required to be set aside in the form of sinking fund to accumulate the amount of original capital
cost at the end of the utility period of the property(otherwise the owner of the property will lose
both the capital and income at the end of the utility period). Hence Years Purchase will be
reduced in such a way that the income of the property will provide both for interest on the
capital and for the accumulation of sinking fund to replace the capital. In such cases Years
Purchase= 1/(i+s) , where s= sinking fund to replace Rs 1 at the end of the period.

9. Define the term sinking fund
◦ Sinking fund- The fund which is gradually accumulated by way of periodic or annual deposit for
replacement of building or structure at the end of its useful life is termed as sinking fund. The
object of creating sinking fund is to accumulate sufficient money to meet the cost of
construction or replacement of building after its utility period. The sinking fund may be created
by taking a sinking fund policy with an insurance company or by depositing in bank to collect
highest compound interest. The cost of land is no taken into account in calculating sinking
fund.The sinking fund may also be required for payment of loan. If a property is owned or
constructed by taking loan, a sinking fund may be created by setting aside a sum of money
annually to accumulate the compound interest in order to repay the debt at the end of the term
of loan.

10. ◦ The amount thus set aside is known as annuity payment. The amount of annual installment of
sinking fund may be found out by the formula

11. ◦ Where S=Total amount of sinking fund to be accumulated;
◦ n = number of years required to accumulate sinking fund;
◦ I = rate of interest in decimal and
◦ I = Annual installment required.

12. Define depreciation
◦ Depreciation- This may be defined as the decrease or loss in the value of property due to
structural deterioration, use, life, wear and tear, decay and obsolescence. Usually a percentage
on depreciation is allowed as depreciation to determine its present value.