Arrange the following steps in the correct order for valuation of goodwill by super profit method.
(A) Calculation of normal profit based on capital employed of the firm.
(B) Calculation of super profit
(C) Calculation of capital employed of the firm
(D) Calculation of goodwill by multiplying super profit with number of years purchase.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → (C), (A), (B), (D)
The super profit method values goodwill on the profit a firm earns above the normal return on its capital. Each step uses the result of the one before it, which fixes the order.
(C) Calculation of capital employed of the firm — the normal profit is a return on capital, so the capital employed has to be known first.
(A) Calculation of normal profit based on capital employed of the firm. — normal profit = capital employed × normal rate of return ÷ 100.
(B) Calculation of super profit — super profit = average profit − normal profit, so it needs the normal profit from (A).
(D) Calculation of goodwill by multiplying super profit with number of years purchase. — the last step, since it works on the super profit from (B).
NCERT (2026-27 edition): |