If average capital employed in a firm is Rs. 15,00,000 and fair rate of return in the same industry was 8%. Goodwill was valued at Rs. 90,000 on the basis of three times of super profit. The Average Profit of the firm is ?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Rs. 1,50,000
Under the super profits method, goodwill = super profit × number of years' purchase, and super profit = average profit − normal profit. So the average profit is found by working backwards.
Super profit = Rs. 90,000 ÷ 3 = Rs. 30,000
Normal profit = Rs. 15,00,000 × 8/100 = Rs. 1,20,000
Average profit = Normal profit + Super profit
Average profit = Rs. 1,20,000 + Rs. 30,000 = Rs. 1,50,000