RES411: ..Mathematics.. of ..Valuation.

RES411 : ..Mathematics.. of ..Valuation..
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MATHEMATICS OF VALUATION
1.0 INTRODUCTION
 The valuer’s business is to estimate the worth of a property and one of the methods
used in determining the value of property is the investment method.
 To use the method the valuer must come to certain conclusions regarding the
property, i.e the net income it can produce, the likelihood of that income or
decreasing in the future, the possibility of future liabilities in connection with the
property and the rate per cent at which prospective buyer is likely to require interest
on his capital.
 Based on that the valuer will then refer to the valuation tables to determine the factor
that will be used to capitalies the net income to arrive the value of property.
 The accuracy of his estimation depends on his skill, judgement and practical
experience. It is the function of the valuation tables to enable the valuer by a simple
mathematical process to express an estimated value.
 Valuation tables have been constructed to eliminate much of the time consuming
aspect of calculation work.
 The valuation table can be considered under 3 broad headings:
i) Single rate tables (SR)

ii) Dual rate tables (DR)
iii) Mortgage installment tables
 The following abbreviations are used.
i = rate of interest per annum expressed

as a decimal
n = term of years
S = annual sinking fund
PV = present value
YP = Year’s purchase / PV of RM 1 per
Annum
2.0 INTEREST
 Interest is the amount of money paid by the borrower for the use of an amount of
money borrowed. It can also be regarded as the amount of money received by the
lender for the use of an amount of money loaned.
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Centre of Studies Estate Management : mnazimalias 1
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2.1 Single interest
 Interest paid on the original amount saved only.
 It is the amount of interest charged on the loan or received by the lender and this
amount accumulates only on the original principal. The interest that accumulates
on, or is received for a simple interest loan is express s:-
I=P.r.t
Where; I = the amount of simple interest

P = the amount of principal borrowed or invested
r = the rate of interest per period (in decimals)
t = the number for which the principle is borrowed
2.2 Compound interest
 Interest that is paid both on the original amount of money saved and on the
interest that has been added to it.
 The amount of interest earned or charge for the use of the principle differs for
each period. The rate of interest earned or charged is set at the same
percentage for the term of the loan, but the amount of interest is calculated on
the principal plus the accumulated interest to date.
 The assumption with compound interest is that the amount of interest charged
for the use of the principal is not collected or paid out in each period. This
uncollected or unpaid interest is added to the principal and this new sum of
principal is used to calculate the interest due for the next period. This process
continues throughtout the term of the loan. Thus the accumulation of uncollected
or unpaid interest generates further interest.
 The formula for compound interest is express as:-
A = P (1+i)n
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3.0 SINGLE RATE TABLE
 Both SR and DR base on compounding interest.
 Single interest is the interest paid on the original amount saved only. (e.g.: RM100
invested for one year @ 8% per annum,: RM100 x 0.08 = RM8)
 Compound interest: interest that is paid both on the original amount of money saved
and on the interest that has been added to it.
 Calculation of SR will be made on 7 basic functions of RM1 i.e.
 Amount of RM1 (A)

 Present Value of RM1 (PV)
 The amount of RM1 per annum
 Annual Sinking Fund (S)
 Year’s Purchase (YP)
 Year’s Purchase in perpetuity
 YP of a reversion to perpetuity
3.1 AMOUNT OF RM 1 (A)
 This is called compounding theory, i.e. (to find the future value)
 This is the amount to which RM1 invested now will accumulate @ i compound
interest in n years.
 Formula: A = (1+i)n
 Example:
To what amount will RM 1 invested at 8% p.a. accumulated in 3 years time?
If RM1 is invested now, it will accumulate at the end of year 1 to:-
o At the end of year 1, amount accumulated to (1+i) 1

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Year Amount Interest Total Amount @ the end of year (Amount +

Invested interest)
1 RM 1 i(1) 1+i(1) = (1+i)1
2 RM (1+i) i(1+i) (1+i) + i = (1+i)2
3 RM (1+i)2 i(1+i)2 (1+i)2 + i= (1+i)3
n RM (1+i)n i(1+i)n (1+i)n + i = (1+i)n
Year Principal Interest @ 8% Total

(RM) (RM)
Amount @ the end of 1 year

(RM1.00 + interest @ 8% on
RM1.00) 1.00 0.08 1.08
Amount @ the end of 2 years
(RM1.08 + interest @ 8% on
RM1.08) 1.08 0.0864 1.1664
Amount @ the end of 3 years
(RM1.1164 + interest @ 8%
on RM1.1164) 1.1164 0.0933 1.2597
 Example:
To what amount will RM1 invested at 6% compound interest accumulate in 4 years?
A = (1 + i)n
= (1 + 0.06)4
= (1.06)4
= 1.2623
If interest is payable half-yearly

A = (1 + i/2)2n
= (1.03)8
= 1.266
If interest is payable quaterly

A = (1 + i/4)4n
= (1.015)16
= 1.268
If interest is payable monthly

A = (1 + i/12)12n
= (1.005)48
= 1.2705
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3.2 PRESENT VALUE OF RM1 (i.e. PV)
 This is the amount that must be invested now to accumulate to RM1 at i compound
interest in n years.
 Formula: PV = 1
(1+i)n
 RM1 RMx
Year 1 2 3 N …….. (Diagram 1)
RMx RM1
Year 1 2 3 N …….. (Diagram 2)
 Diagram 1 shows the amount of RM1 while diagram 2 is the present value of RMx,
therefore PV is the reciprocal of the amount of RM1.
 This is called discounting theory.
 Example:
What amount must be invested now at 8% to accumulate to RM1 in 7 years’ time?
PV = 1 Say the amount to be invested = V

(1+i)n
= 1 V = 1
(1.08)7 (1 + 0.087)7 x 1
= 0.583 V = 0.583 x 1
= RM0.583
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A man has a right to receive RM100 in 12 years’ time. What is the present value of
this right, assuming that capital could be invested at 7.5% compound interest?
PV = 1
(1+i)n
= 1
(1.075)12
= 1
2.381
= 0.419
Present value = 0.419 x RM100

= RM41.90
3.3 THE AMOUNT OF RM1 PER ANNUM
 This is the amount to which RM1 invested at the end of each year will accumulate
@ i compound interest in n years.
 Formula: or
A–1 (1+i)n - 1
i i
 The above formula can be explained if RM1 will be invested at the end of each year
@ i interest for n years as follows:
years 0 1 2 3 4 n
RM0 RM1 RM1 RM1 RM ?

1
Years Amount @ the end of year n

1 RM1
2 RM1 + (1+i)
3 RM1 + (1+i) + (1+i)
4 RM1 + (1+i) + (1+i) + (1+i)
N
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The total amount is the geometrical progression (GP) and at the end of ‘n’ years GP
is used as follows:
S = a(rn – 1) where a = RM1

r–1 r = RM1(1+i)
n = Years
S or RM1 per annum = 1 [(1+i)n – 1]

(1+i) – 1
= (1+i) – 1
i
= A–1
i
 Example: Amount of RM1 per annum
a) Calculate the amount of RM1 per annum for 3 years at 6% compound interest.
A RM1 per annum = (1.06)3 – 1

0.06
= 1.191 – 1
0.06
= 3.183
b) RM100 is invested at the end of each year in a bank giving 6.5% compound
interest. To what amount will this accumulate after 20 years?
A RM1 per annum = (1+i)n – 1

i
= (1.065)20 – 1
0.065
= 3.524 – 1
0.065
= 38.83
For RM100, accumulation will be;
38.83 x RM100 = RM3883
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3.4 ANNUAL SINKING FUND (i.e. S)
 This is the annual sum required to be invested at the end of each year in order to
accumulate to RM1 in ‘n’ years at ‘i’ compound interest.
 ASF is the reciprocal of RM1 per annum.
i.e. S = 1
RM1 per annum
S = 1
A–1
i
S = i
A–1
 Example: Annual sinking fund
a. The owner of a house anticipates that he will need to provide a new staircase
in 10 years’ time at an estimate cost of RM7000. If capital can be invested at
8% compound interest. What amount should be invested annually to meet his
future estimated cost?
S = i
(1+i)n – 1
= 0.08
(1.08)10 – 1
= 0.08
2.158 – 1
= 0.069
So that the Annual Sinking Fund to provide RM7000 is;
0.069 x RM7000 = RM483
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3.5 YEAR’S PURCHASE (i.e. YP)
 This is the present value of a right to receive RM1 @ the end of each year to n
years at ‘i’ compound interest.
0 1 2 3 4 n years
RM1 RM1 RM1 RM1 RMx
 The above diagram shows RM1 p.a. invested @ each year until n years. Say this
amount is RMx, this amount will be multiplied by PV of RM1 i.e.
PV RM1 pa = RM1 pa x PV RM1
= A–1 1
x
i A
= 1 1 – PV
1 - or
A I
i
 Example: Years’ Purchase (i.e. YP)
A landlord will receive RM10000 per annum rent from his tenant for the next 20
years. Assuming 8% compound interest, what is the capital value of the income?
YP for 20yrs @ 8% = 1 – 1/(1.08)20

0.08
= 1 – 1/4.66
0.08
= 1 – 0.2145
0.08
= 0.7855
0.08
= 9.818
So that capital value of RM10000 per annum is;
9.818 x RM10000 = RM98180
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3.6 YEAR’S PURCHASE IN PERPETUITY
 This is the present value of the right to receive RM1 at the end of each year in
perpetuity @ i compound interest.
 Formula: YP in perpetuity = 1
I
 If the no. of years increase the value of PV decrease as n approach perpetuity.
Years PV @ 10%
1 0.90909
50 0.00852
100 0.00007
Therefore,
1
1 -
PV RM1 pa for n years = A
i
(Where 1/A is the PV)
= 1 – PV RM1 in perpetuity
i
= 1–0
i
= 1
i
 Example: Year’s Purchase in Perpetuity (YP in perpetuity)
A is the owner of a freehold interest in a shop yielding a net income of RM25000 per
annum. Assuming 7% compound interest, calculate the capital value of A’s interest.
YP in perpetuity at 7% p.a = 1/i

= 1/0.07
= 14.286
So, capital value = 25000 x 14.286

= RM375,150
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3.7 YEARS PURCHASE OF A REVERSION TO A PERPETUITY.
 This is the present value of a right to receive RM1 at the end of each year in
perpetuity at i compound interest but receivable after the expiration of n years.
 Formula:
1 1
YP reversion to perpetuity = or
i(1+i)n Ai
RM1 RM1 RM1 RM1

n years perpetuity
 YP perp shows the amount invested @ the end of each year till perpetuity after its
reversionary.
 Therefore;
YP in reversion to perpetuity = PV x YP Perp
1
= PV x
i
1 1
= x
A i
1
=
Ai
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 Example:
Dr Aisyah will receive the full rental value of RM36,000 per annum. Presently she let
her house at a rental of RM24000 pa for 7 years with an interest of 8%. Value the
interest of Dr Aisyah.
TERM
Net Rental 24,000 pa nett

(x) YP 7 years @ 8%
i.e. PV of RM1 for 7yrs @8%
1
1 -
= A
I
1
1 -
= (1+0.08)7 5.20
i 124,800
REVERSION
FRV 36,000
YP perp in reversion
to perpetuity
(x) YP rev. perp in 7yrs@8% 7.29 262,440
Or CV = 387,240
YP perp @ 8% = 12.5
PV 7yrs @ 8% = 0.5834
7.29
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4.0 DUAL RATE TABLE (DR) used for calculating the capital value
 Dual Rate tables should be used for calculating the capital value of income that is to
be received for a known limited period. This will occur in land and property with
leasehold interest that will expire on a specific date.
 If an interest has income that is receivable for a limited period only, the purchaser
could not afford to pay the same amount as for the purchasing of perpetual stream
of income. At the end ff the period, the income would cease and the original capital
would be lost.
 Dual rate tables are based on the assumption that the investor would annually set
aside a sum out of the income received. This would be invested as a sinking fund to
recoup the original capital at the end of the term.
 In single rate table, it is assumed that SF is inherent in the formula. However,

original capital should be replaced at the end of the investment by provision of SF.
SF is assumed to be taken out in practice at low safe rate of 2.5-5%.
50,000
(CV) Recoupment
of capital
SF

SF

SF
CV = 0
20yr
1 2 3 4 n s
 Lately DR table has been criticed by valuers all over the world as to the assumption
made on SF (low safe rate). However, for educational purposes this, DR table still
useful and being taught in IPTA.
4.1 YEAR’S PURCHASE (DUAL RATE)
 This is the CV of the right to receive RM1 at the end of each year for N years at i
compound interest, but allowing sinking fund S to recoup RM1 after N years.
 How to get Y.P dual rate formula

 Assume the rate of interest for RM1= i & SF = S
 Total income = i+S
 Assume CV = M
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Yearly income = M (i + S)
 Formula
CV = Income x Y.P
So,
Y.P = CV
Income
Y.P = M
M (i + S)
Y.P = 1
i+S
 i is known as Remenurative Rate (Ganjaran) (usually 0.5% - 1.5% above FH –

(Inferior)
 S is known as Accumulative Rate (B.Mengumpul) (Bond @ 3%)
 Example:
Find the CV of an income receivable for 5 years at RM2,000 pa net, assuming a rate
of return @ 7% pa & SF @ 3%
Net Income RM 20,000 pa

(x) YP for 5 yrs @ 7% & 3%
= 1
i+S
1
= i+ i
A–1
1
= i+ i
(1+i)n – 1
1
= 0.07 + 0.03
(1.03)5 – 1
1
=
0.07 + 0.1886
= 1
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0.258 3.87
CV RM 77,400
4.2 Y.P DUAL RATE WITH TAX
 FH ignores taxation
 LH takes into account taxation

Y.P must include taxation
Example: Value LH, with 10 years lease, an income of RM2,000 and yield at 8%,
SF @ 3% & tax @ 40%
Profit Rent RM 2,000
Y.P 10 years @ 8/3/40 4.40
Capital Value 8,800
CHECK
Spendible income = 0.08 x 8800 = 704
Sinking Fund = Income – S.Y

= 2,000 – 704 = 1296
less
Tax @ 40% 518.40
SF 777.60
At the end of 10 years capital will accumulate:
SF = 777
(x) Amount of RM1 per annum @ 3% = 11.46

8911
 Valuation without taxation
Profit Rent = 2,000

(x) Y.P 10 years @ 8%/3% = 5.79
Capital Value = 11,940
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4.3 EFFECT OF TAXATION
 SF which has been kept/invested will be taxed.
 Not only SF, but the interest accumulates from the SF will also be taxed.
 Accumulation rate must be net of tax.
 If the accumulation rate is gross it must be net by using net adjustment factor
ie TN = 1 – Rate of tax
= (1 – x)
1
 Eg: if gross rate is 4.5%, tax @ 30%
Net SF rate = Gross rate x (TN factor)

= 4.5 x (1 – x)
= 4.5 x (1 – 30/100)
= 4.5 x 1 – 0.30
1
= 4.5 x 0.70
= 3.15
 Then the SF element must be again adjusted for net of tax by using gross
adjustment tax (GAF)
ie TG = 1
1 – Rate of tax
Say net SF rate = 3%, tax @ 40%
GAF = S x 1
1 – 0.4
= S x 1
0.6
= S x 1.6667
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 Example:
Find an income receivable for 12 years at RM20,000 pa. @ rate of interest @ 8%,
SF @ 4.5% gross and tax @ 33%
Net of tax SF = Gross rate x (1 - x)

= 4.5 x (1 – 33/100)
= 4.5 x 1 – 0.33
1
= 4.5 x 0.67
= 3.015
= Say 3%
Adjustment of TG factor (YP DR)
1
YP DR @ 8/3/40 = i+ 1
S
1-x
1
= I 1
i+
(1 + i)n -1 1–x
1
= 0.03 1
0.08 +
(1.03)12 -1 1 – 0.33
1
= 0.08 + 1
(0.071)
0.67
1
=
0.08 + (0.071) (1.4925)
= 1
0.08 + (0.1059)
1
=
0.1859
= 5.379
Valuation
Net Income RM
20,000 p.a
(x) YP DR @ 8/3/33 5.379
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CV 107,580
5.0 THE ANNUITY RM1 WILL PURCHASE
 This is the annual income receivable at the end of each year for n years if RM1 is
invested at i compound interest and a sinking fund is provided at 2½ percent to
recoup RM1 at the end of the term (LH interest)
 Formula:
Annuity RM1 will purchase = i + s
 Example:
A purchaser recently bought an interest for RM200,000; it had 15 years’ duration. If

he required a 7% return, what was the net income per annum receivable from the
property?
Net Income p.a = CV x (i + s)
= 200000 x 0.07 + 0.025

(1.025)15 – 1
= 200000 x (0.07 + 0.056)
= 200000 x 0.126
= RM25,200
 25,200 form 2 parts i.e., the return on capital @ 7% of the outlay i.e. 14,000, leaving
RM11,200 and this is the return of capital, 11,200 do not return 200,000 because
each payment is in the nature of a SF which needs to be invested to attract
compound interest @ 2.5% such as
ASF 11,200
(x) RM1 pa for 15 yrs 17.85
@ 2.5% CV 200,000
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6.0 MORTGAGE INSTALLMENT TABLE
 It is an equal amount to be paid monthly to redeem each RM100 capital borrowed

over ‘n’ years at i compound interest.
 It is calculated on the fixed annual basis with no allowance for interest to compound
on each monthly installment.
(i) Formula: (i + s) 100 (monthly)

12
OR
(ii) Formula: P = M(1+i)n x i (yearly)

(1+i)n – 1
 Example:
Calculate the monthly installment to redeem RM300,000 borrowed over 25 years at

10.5% compound interest:
Capital sum = RM300,000

Mortgage redemption for RM300,000
= 3000 x (i + s) 100
12
= 3000 x 0.105 + 0.105

100
(1.105)25 - 1
12
= 3000 x 0.114 x 100

12
= 3000 x 0.95
= RM2,850
 An alternative formula can be used to calculate the yearly installment.
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7.0 DEPRECIATION
 When a new plant or machinery is purchased, its value as at purchase wll

depreciate year by year. His annual depreciation may be express as a fixed
percentage, i per annum, when the value at any particular time can be determined
by means of a compound interest calculation when a negative value.
 Thus, if the original value = P, the depreciating rate of interest per annum = I, term
of years = n and the value after n years = D then;
The formula: D= P(1-i)n
 Example:
At the of each year the depreciation of certain plant is taken 8% of its value at the
beginning of the year. If the initial value is RM3000, calculate the value after 7 years.
P = RM3000, i = 0.08 and n = 7 years
D = 3000 x (1- 0.08)7

= 3000 x (0.92)7
= RM1674
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8.0 ANALYSING OF YIELD
 Valuation table equation.
 CV = NI x YP
 Examples (Using table)

A leasehold property, let last year for a term of 5 years at a rental of RM10,000 per
annum net. Recently he said property was sold at RM21,500, FRV @ RM20,000
net.
Profit Rent x Y.P = CV
10,000 x Y.P = 21,500
x Y.P = 21,500
10,000
Y.P = 2.15
 Assume SF @ 3%, Tax @ 40%, Find

Y.P 5 years @ …..%/3%/40%
 From table Y.P 2.15 @ 3% SF & 40% Tax

= 15% -16%
 USING EQUATION
Profit Rent x Y.P = CV
10,000 x Y.P = 21,500
10,000 x 1 = 21,500
i +S
1 = 21,500
i +S 10,000
1 = 2.15
i +S
1 = 2.15
i+ i 1
A -1 1-t
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1 = 2.15
0.03 1
i + (1.03)5-1 0.6
1 = 2.15
i+ 0.03 (1.67)
0.16
i + 0.313 = 1
2.15
i + 0.313 = 0.465
i = 0.465 - 0.313
i = 15%
9.0 RENT PAYMENTS
 Traditional valuation method – basis of capitalization of the rent is that the income is
received annually in arrears.
 Valuation tables that we use based on interest compounded annually at the end of
the year.
 The compound interest formula = (1 + i)n (Amount of RM1)
So, when interest is paid more frequently, the formula is modified to be:
nm
1+ I Where i = Rate of interest
M n = No. of years
m = No. of payment per year
“The more frequently interest is paid, the greater will be the amount earned”
Example: RM1,000 invested at 8% compound for 4 years annually:
1,000 x (1 + i)n = 1,000 x (1 + 0.08)4
= 1,000 x 1.360
= 1,360
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Example: interest paid every 6 months (half-yearly)

mn
1,000 1+ 0.08 = 1,000 x (1.04)2x4
2
= 1,000 x (1.3686)
= 1,368
Example: interest paid every quarterly (every 3 months)

mn
1,000 1 + 0.08 = 1,000 (1.02)4x4
4
= 1,000 (1.3728)
= 1,372.8
10.0 RENT IN ADVANCE
1st Concept
J = i (1 + i)1/m
m (1 + i)1/m – 1
Where, i is the rate of interest

m is the no. of payments made in a year
Examle: Calculate Y.P for an income received quarterly in advance for 7 years @ 8% p.a.
YP in arrears 7 years @ 8% = 5.2064

(x)
Conversion factor
= 0.08 x (1.08)¼
4 (1.08¼ - 1)
= 0.08 x 1.0194
4 x (1.0194 – 1)
= 1.0495
YP quarterly in advance 5.4642

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For income received annually in advance YP can be calculated as follow:
YP annually in arrears
for 6 years @ 8% 4.6229
Add income due immediately 1
YP annually in advance 5.6229
2nd Concept
YP in advance for n periods = 1 + YP in arrears (n – 1) period
Example: For annually in advance, rate of return (ROR) @ 8%, term 10 years
YP in advance 10 yrs @ 8% = 1 + YP in arrears (10-1) yrs @ 8%

= 1 + YP in arrears 9 yrs @ 8%
= 1 + 6.2469
= 7.2469
Example: For half-yearly in advance:
YP 10 yrs half – yearly in advance 4% = 1 + YP 19* yrs @ 4%

= 1 + 13.1339
= 14.1339
nm-1
* 1+ i
2x10-1
=1+ 0.04
= (1.02)19
Example: for quarterly in advance:
YP 10 yrs quarterly in advance @ 2% = 1 + YP 39 yrs @ 2%

= 1 + 26.9026
= 27.9026
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11.0 RENT (INCOME) IN ARREARS VS RENT (INCOME) IN ADVANCE
Assuming an income of RM10,000 p.a., no. of years is 10 years and the rate of interest is
8%;
Rent payable yearly
In Arrears
Net Income - RM10,000 p.a.

YP 10 years in arrears @ 8% - 6.71
RM67,100
In Advance
Net Income - RM10,000 p.a.

YP 10 years in advance @ 8% - 7.2469
(1 + YP in arrears 9 years @ 8%)
(1 + 6.2469 = 7.2469)
RM72,469
12.0 RENTAL GROWTH
Formula: (1 + i) m – 1
Example:
0.5% per month
10,000 p.a.
2 years 3 years
0.5% per month = ? % Per annum

(1 + i)12 - 1 = (1 + 0.005)12 - 1
= 1.0617 - 1
= 0.0617
= 6.17%
Rent for next 3 years = (1 + i)n = (1.06)3

= 1.1910
= 10,000 x 1.1910
= 11,910
Say 12,000
______________________________________________________
_______________________________________________________________________________
Valuation Assume All Risk Yield @ 8%
1st 2 years
Rent Received - 10,000 p.a.

YP 2 years @ 7% - 1.8080
18,080
Next 3 years
Rent Received - 12,000 p.a.

YP 3 years @ 8% - 2.5771
PV 2 years @ 8% - 0.8573 2.2093
26,512
Capital Value 44,592
What about if rental growth every 3 months (or quarterly)?
Example:
0.5% per quarterly (every 3 months)
0.5% per 3 months = ? % Per annum

(1 + i)4 - 1 = (1 + 0.005) 4 – 1
= (1.005) 4
= 1.02 – 1
= 0.02
= 2% per annum
0.5% per. Quarterly

10,000 p.a. ?
2 years 3 years
= (1 + i)n
= (1.02)3
= 1.06
10,000 x 1.06 = 10,600 p.a. (Rental for the next 3 years)
______________________________________________________
_______________________________________________________________________________
Valuation Assume All Risk Yield @8%
1st 2 years
Rent - 10,000 p.a.

YP 2 years @ 7% - 1.8080 What
18,080 about if
Next 3 years rental
growth
Rent - 10,600 p.a. every 6
YP 3 years @ 8% - 2.5771 months (or
PV 2 years @ 8% - 0.8573 2.2093 half-
23,419 yearly)?
Example:
0.5% (every 6 months)
0.5% per 6 months = ? % Per annum

(1 + i)2 – 1 = (1 + 0.005) 2 - 1
= (1.005) 2
= 1.01 - 1
= 0.01 ~ 1% p.a.
0.5% every 6 months

10,000 p.a. Rent?
2 years 3 years
(1 + i)n = (1 + 0.01) 3
= (1.01)3
= 1.03
10,000 x 1.03 = 10,300 p.a.
Valuation Assume All Risk Yield @8%
1st 2 years
______________________________________________________
_______________________________________________________________________________
Rent - 10,000 p.a.

YP 2 years @7% - 1.8080
18,080
Next 3 years
Rent - 10,300 p.a.

YP 3 years @8% - 2.5771
PV 2 years @8% - 0.8573 2.2093
22,756
CONCLUSION
 At the end of this topic, students must be able to understand the concept and
principles of mathematics in property valuation.
 Students must be able to understand and differentiate the different types of table
such as:
a) • Amount of RM1
• PV of RM1
• Annual Sinking Fund
• Amount of RM1 per annum
• PV of RM1 per annum (Y.P)
• YP in perpetuity
• YP of a reversion to perpetuity
• YP Dual Rate
• YP Dual Rate adjustment to taxation
• Annuity of RM1 will purchase
• Mortgage installment table
• Depreciation
b) • Rental in arrear/advance
• Rental growth
• Rent payments
______________________________________________________

RES411: ..Mathematics.. of ..Valuation.

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RES411: ..Mathematics.. of ..Valuation.

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RES411 : ..Mathematics.. of ..Valuation..

 The valuation table can be considered under 3 broad headings:

i) Single rate tables (SR)

 The following abbreviations are used.

i = rate of interest per annum expressed

2.1 Single interest

 Interest paid on the original amount saved only.

Where; I = the amount of simple interest

2.2 Compound interest

 The formula for compound interest is express as:-

3.0 SINGLE RATE TABLE

 Both SR and DR base on compounding interest.

 Calculation of SR will be made on 7 basic functions of RM1 i.e.

 Amount of RM1 (A)

3.1 AMOUNT OF RM 1 (A)

To what amount will RM 1 invested at 8% p.a. accumulated in 3 years time?

If RM1 is invested now, it will accumulate at the end of year 1 to:-

o At the end of year 1, amount accumulated to (1+i) 1

Year Amount Interest Total Amount @ the end of year (Amount +

Year Principal Interest @ 8% Total

Amount @ the end of 1 year

To what amount will RM1 invested at 6% compound interest accumulate in 4 years?

If interest is payable half-yearly

If interest is payable quaterly

If interest is payable monthly

3.2 PRESENT VALUE OF RM1 (i.e. PV)

Year 1 2 3 N …….. (Diagram 1)

Year 1 2 3 N …….. (Diagram 2)

 This is called discounting theory.

What amount must be invested now at 8% to accumulate to RM1 in 7 years’ time?

PV = 1 Say the amount to be invested = V

Present value = 0.419 x RM100

3.3 THE AMOUNT OF RM1 PER ANNUM

RM0 RM1 RM1 RM1 RM ?

Years Amount @ the end of year n

S = a(rn – 1) where a = RM1

S or RM1 per annum = 1 [(1+i)n – 1]

 Example: Amount of RM1 per annum

A RM1 per annum = (1.06)3 – 1

A RM1 per annum = (1+i)n – 1

For RM100, accumulation will be;

38.83 x RM100 = RM3883

3.4 ANNUAL SINKING FUND (i.e. S)

 ASF is the reciprocal of RM1 per annum.

 Example: Annual sinking fund

So that the Annual Sinking Fund to provide RM7000 is;

0.069 x RM7000 = RM483

3.5 YEAR’S PURCHASE (i.e. YP)

RM1 RM1 RM1 RM1 RMx

PV RM1 pa = RM1 pa x PV RM1

 Example: Years’ Purchase (i.e. YP)

YP for 20yrs @ 8% = 1 – 1/(1.08)20

So that capital value of RM10000 per annum is;

9.818 x RM10000 = RM98180

3.6 YEAR’S PURCHASE IN PERPETUITY

 If the no. of years increase the value of PV decrease as n approach perpetuity.

 Example: Year’s Purchase in Perpetuity (YP in perpetuity)

YP in perpetuity at 7% p.a = 1/i

So, capital value = 25000 x 14.286

3.7 YEARS PURCHASE OF A REVERSION TO A PERPETUITY.

RM1 RM1 RM1 RM1

YP in reversion to perpetuity = PV x YP Perp

Net Rental 24,000 pa nett