Arrange the following steps in correct order to calculate the value of Goodwill by super profit method.

A. Calculate Capital Employed
B. Calculation of Average profit
C. Calculate Super profit
D. Calculate normal profit
E. Calculate value of Goodwill

Choose the correct answer from the options given below:

B, A, D, C, E

The correct answer is Option (1) - B, A, D, C, E.

The average profits (simple or weighted) method of calculating goodwill operates on the assumption that a new business would not generate any profits in its initial years. Consequently, when someone acquires an existing business, they are expected to pay for the anticipated profits for the first few years in the form of goodwill. However, it is argued that the actual benefit for the buyer should not be based on total profits, but rather on the profits exceeding the normal return on capital invested in a similar business. This leads to the suggestion of valuing goodwill based on the excess profits, referred to as super profits. To determine goodwill using this method, the following steps are involved:

Calculation of Average Profit (B)- This step involves determining the average profit earned by the business over a specific period. Take the total profit over several years and divide it by the number of years to arrive at an average figure. This average profit serves as a basis for further calculations.

Calculate Capital Employed (A) - Capital employed refers to the total amount of capital that is used in the business for its operations. This figure helps assess how much capital is invested in the business.

Calculate Normal Profit (D)- Normal profit is the minimum profit that a business needs to earn to cover the cost of capital. It is usually calculated as a percentage of the capital employed.

Calculate Super Profit (C)- Super profit is the excess of average profit over normal profit. It indicates how much more the business is earning compared to the expected return on capital employed. The formula is:
Super Profit = Average Profit - Normal Profit

Calculate Value of Goodwill (E)- The value of Goodwill is often calculated by multiplying the super profit by a certain number of years of purchase (often based on industry standards or negotiation).