Valuation of a cinema hall (land Rs 15 lakh)

Factors affecting the value of property

Location, demand and supply, utility and use, size and shape of the plot, age and condition of the building, income (rent), legal restrictions (zoning, FAR, tenancy), services and infrastructure, economic conditions, risk of disasters, and the general neighbourhood and image.

Valuation of the cinema hall (income / profit method)

Method: The net annual income is found after deducting all outgoings, and is capitalised by a dual-rate year's purchase. Land is not redeemed, so interest on the land value is deducted from the net income first; the remainder is the income from the building and plant, which is capitalised and then added to the land value. (The sinking fund for the machinery is taken as an annual outgoing.)

Annual outgoings

Sinking fund for machinery: depreciable amount = 90% × 55,00,000 = Rs 49,50,000 (the 10% scrap value is recovered). For n = 25 years and i = 5%:

$$I_{sf} = \frac{S\,i}{(1+i)^n-1} = \frac{49{,}50{,}000 \times 0.05}{(1.05)^{25}-1} = Rs\ 1{,}03{,}715$$

Net income

$$\begin{aligned} \text{Net income} &= 90{,}00{,}000 - 33{,}18{,}715 = Rs\ 56{,}81{,}285 \\ \text{Interest on land at 8\%} &= 0.08 \times 15{,}00{,}000 = Rs\ 1{,}20{,}000 \\ \text{Net income from building} &= 56{,}81{,}285 - 1{,}20{,}000 = Rs\ 55{,}61{,}285 \end{aligned}$$

Year's purchase (60 years, interest 8%, redemption of capital 4%)

$$YP = \frac{1}{i + \dfrac{r}{(1+r)^n - 1}} = \frac{1}{0.08 + \dfrac{0.04}{(1.04)^{60}-1}} = 11.876$$

Capitalised value of building and plant

$$55{,}61{,}285 \times 11.876 = Rs\ 6{,}60{,}47{,}068$$

Value of the property = building value + land = 6,60,47,068 + 15,00,000 = Rs 6,75,47,068

Answer: Value of the cinema hall is about Rs 6.75 crore (Rs 6,75,47,000).