The books of a business showed that the firm's capital employed on December 31, 2015, is Rs. 5,00,000 and the profits for the last five years were: 2011-Rs. 40,000: 2012-Rs. 50,000; 2013-Rs. 55,000; 2014- Rs. 70,000 and 2015-Rs. 85,000. You are required to find out the normal profits of the business, given that the normal rate of return is 10%.
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Rs. 50,000
Normal profit is what the capital employed would earn at the normal rate of return in that kind of business:
Normal profit = Capital employed × Normal rate of return ÷ 100
= Rs. 5,00,000 × 10 ÷ 100 = Rs. 50,000
The five years’ profits are needed for the next steps of the super profits method, not for this one: their average is Rs. 3,00,000 ÷ 5 = Rs. 60,000, and the super profit is Rs. 60,000 − Rs. 50,000 = Rs. 10,000. Taking the average profit (Rs. 60,000) as the normal profit is the usual slip.
NCERT (2026-27 edition):
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