A business has earned average profits of Rs. 1,00,000 during the last few years and the normal rate of return for a similar business is 10%. Ascertain the value of goodwill by capitalization of average profits method, given that the value of net assets of the business is Rs. 8,20,000.

Rs.1,80,000

The correct answer is Option (2) → Rs.1,80,000.

Average profits = 1,00,000

Capitalised value of average profits = 1,00,000 X 100/10
                                                   = 10,00,000

Net assets of the business = 8,20,000

GOODWILL = Capitalised value of average profits - Net assets
                 = 10,00,000 - 8,20,000
                 = 1,80,000