Goodwill of the firm was valued at ₹7,20,000 being valued on the basis of 4 years purchase of super profit of the firm. Capital employed of the firm was ₹ 25,00,000 and firm made profit of ₹4,80,000. Determine normal rate of return.
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → 12%
Under the super profits method, goodwill = super profit × years’ purchase, so the normal profit can be worked back:
Super profit = ₹7,20,000 ÷ 4 = ₹1,80,000
Normal profit = Actual profit − Super profit = ₹4,80,000 − ₹1,80,000 = ₹3,00,000
Normal rate of return = ₹3,00,000 ÷ ₹25,00,000 × 100 = 12%