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 25%. Ascertain the value of goodwill by capitalisation of average profits method, given that the value of net assets of the business is ₹3,20,000.

₹80,000

The correct answer is option 1- ₹80,000.

Average profits = 1,00,000
Normal rate of return = 25%

Capitalised value of average profits = Average profits x 100/Normal rate of return
                                                   = 1,00,000 X 100/25
                                                   = 4,00,000

Net assets of the business = 3,20,000

Goodwill = Capitalised value of average profits - Net assets
             = 4,00,000 - 3,20,000
             = 80,000