How is normal profit calculated while valuing goodwill?
Answer & explanation
Correct answer: option 1
The correct answer is option 1- Capital Employed × (Normal Rate of Return/100).
Normal profit is the minimum profit that a business needs to earn to cover the cost of capital. It is usually calculated as a percentage of the capital employed. So, the right formula to calculate the normal profit is Capital Employed × (Normal Rate of Return/100).