1 / 6

Cost Method

Cost Method. Replacement Cost Method. Used to value specialised properties that are seldom sold Manufacturing: Chemical works Oil refineries Public administration Schools and colleges Town halls, courts and prisons Hospitals, art galleries Infrastructure Airports Railway buildings

beaumont-dilan
Download Presentation

Cost Method

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Cost Method

  2. Replacement Cost Method • Used to value specialised properties that are seldom sold • Manufacturing: • Chemical works • Oil refineries • Public administration • Schools and colleges • Town halls, courts and prisons • Hospitals, art galleries • Infrastructure • Airports • Railway buildings • Valuations required for • company accounts • business rates • insurance (known as reinstatement valuations)

  3. Replacement Cost Method • Assumes that the value of existing property = the cost of providing an alternative similar property • Must allow for depreciation (due to age and obsolescence) • Method calculates replacement cost rather than market value • Method: • Cost of new building • Less allowance for depreciation • Plus value of land (not included if valuation is for insurance purposes) • Equals value of property • Several methods of calculating depreciation allowance • Straight line • Reducing balance • Sinking fund

  4. Replacement Cost Method:Valuation for accounts A purpose-built industrial property with an estimated life of 90 years with 16 years remaining has a GIA of 2,500 m2 and a site area of 0.8 hectares. The current value of this property needs to be estimated for inclusion in the company accounts. [1] Figure obtained from comparable evidence of land sales [2] An overall figure or prices of component parts may be used

  5. Replacement Cost Method:Valuation for insurance Also known as reinstatement valuations, provides for a similar property as at the date of the valuation or at the commencement of insurance policy cover, should be carried out at least every three years [1] Building costs can be broken down into component parts and based on a Quantity Surveyor’s bill of quantities [2] Building area can also be broken down [3] Obsolescence may affect different parts of building at different rates [4] Depreciation also can vary according to type of structure

  6. Replacement Cost Method:Valuation for rating • Method produces a capital value which must be ‘de-capitalised’ at an appropriate yield (usually between 3 – 6%) to find a rental value • Example valuation of an old hospital building… Current cost of erecting a modern equivalent) £ 250 m Less: Allowance for age and obsolescence of Existing building (as a % age) say 60% - £ 150 m Add: value of site on which building stands + £ 3.5 m Effective Capital Value (ECV) of existing building £103.5m Converted to annual (rental) equivalent multiply by say 6% £6.21 m

More Related