Capitalized Value and Year’s Purchase | Property Valuation System

Property Valuation System

Capitalized Value and Year’s Purchase calculations are a necessary part of Building estimation system or we could simply term it as “Property Evaluation System”.  The Value of a property is listed into various different categories such as;

1. Market Value
2. Book Value
3. Capital Cost
4. Capitalized Value

In this article, we are going to discuss and study “what is capitalized value of a property?” which will form the part of Evaluation system and Year’s Purchase which will fall under the category of investment system.

Capitalized Value of a Property

The capitalized value of a property is the amount of money whose annual interest at the highest prevailing rate of interest will be equal to the net income from the property. To determine the capitalized value of a property, it is required to know the net income from the property and the highest prevailing rate of interest.

Therefore, Capitalized Value = Net income x year’s purchase

Year’s Purchase

Year’s purchase is defined as the capital sum required to be invested in order to receive a net receive a net annual income as an annuity of rupee one at a fixed rate of interest.

The capital sum should be 1×100/rate of interest.

Thus to gain an annual income of Rs x at a fixed rate of interest, the capital sum should be x(100/rate of interest).

But (100/rate of interest) is termed as Year’s Purchase.

Capital Sum = Annual income x Year’s Purchase

The multiplier of the net annual income to determine the capital value is known as the Year’s Purchase (YP) and it is useful to obtain the capitalized value of the property.