The goodwill of the firm was valued ₹7,20,000 on the basis of 4 years purchase of super profit of the firm. The capital employed of the firm was ₹25,00,000 and the firm made a profit of ₹4,80,000. Determine the normal rate of return.
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → 12%
Under the super profits method, goodwill = super profit × years’ purchase and super profit = actual profit − normal profit. Working backwards:
Super profit = ₹7,20,000 ÷ 4 = ₹1,80,000
Normal profit = ₹4,80,000 − ₹1,80,000 = ₹3,00,000
Normal rate of return = ₹3,00,000 ÷ ₹25,00,000 × 100 = 12%