The correct answer is option 4- Capitalization Method.
Under Capitalization Method No. of Year's Purchase are not considered.
* Average profit method = Average profit x no of years purchase.
This method simply takes the average of past profits for a chosen period and multiplies it by a number of years' purchase to arrive at the goodwill value. It doesn't consider the capital employed in the business.
* Weighted average profit method = Weighted average profit x no of years purchase.
This method calculates an average profit but assigns weights to profits from different years. Typically, more recent years are given higher weightage. The weighted average profit is then multiplied by a number of years' purchase to determine goodwill.
* Super profit method = Super profit x x no of years purchase.
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.
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