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%.
Goodwill = Super profit x No of year purchase
7,20,000 = Super profit x 4
Super profit = 7,20,000/4
= ₹1,80,000
Super profit = Actual profit - Normal profit
1,80,000 = 4,80,000 - Normal profit
Normal profit = 4,80,000 - 1,80,000
= ₹3,00,000
Normal profit = Capital employed x Normal rate of return/100
3,00,000 = 25,00,000 x normal rate of return/100
Normal rate of return = 3,00,000 x 100/25,00,000
= 12%