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.
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Rs. 80,000
Under the capitalisation of average profits method, the average profit is capitalised at the normal rate of return to find what the whole business is worth; goodwill is the part of that value not covered by the net assets.
Capitalised value of average profits = Rs. 1,00,000 × 100/25 = Rs. 4,00,000
Net assets of the business = Rs. 3,20,000
Goodwill = Rs. 4,00,000 − Rs. 3,20,000 = Rs. 80,000
Rs. 4,00,000 is the capitalised value itself; stopping there forgets to deduct the net assets.
NCERT (2026-27 edition):
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