A business has earned average profits of ₹1,00,000 during the last few years and the normal rate of return in a similar business is 10%. Ascertain the value of goodwill by capitalisation of average profits method, given that the value of net assets of the business is ₹8,20,000.
Answer & explanation
Correct answer: option 3
The correct answer is option 3- ₹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