The books of a business showed that the firm's capital employed on December 31, 2015, is Rs. 5,00,000 and the profits for the last five years were: 2011-Rs. 40,000; 2012-Rs. 50,000; 2013-Rs. 55,000; 2014- Rs.70,000 and 2015-Rs. 85,000. Find out the normal profits of the business, given that the normal rate of return is 10%.
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Rs. 50,000.
Capital employed = 5,00,000
Normal rate of return = 10%
Normal profit = Capital employed x Normal rate of return/100
= 5,00,000 x 10/100
= 50,000