Read the passage carefully and answer the next 5 questions.
The books of a business showed that the firm's capital employed on December 31, 2024, ₹5,00,000 and the profits for the last five years were: 2020-₹40,000: 2021-₹50,000; 2022-₹55,000; 2023- ₹70,000 and 2024-₹85,000. You are required to find out the value of goodwill based on 2 years purchase of the super profits of the business, given that the normal rate of return is 10%.
In case normal profit is ₹60,000 then what will be the normal rate of return?
Answer & explanation
Correct answer: option 1
The correct answer is option 1- 12%.
Capital employed = ₹5,00,000
Normal profit = 60,000
Normal profit = Capital employed x Normal rate of return/100
60,000 = 5,00,000 x Normal rate of return/100
Normal rate of return = 60,000 x 100/5,00,000
= 12
So, normal rate of return is 12%.