Question

A firm's profit during the year 2017, 2018, 2019 and 2020 are 16,000; 20,000; 24,000 and 32,000 respectively. The firm has capital investment of 1,00,000. A fair rate of return on investment is 18% per annum. Value of goodwill based on three years' purchase of average super profit for the last 4 years will be …….. ​

Answer 1

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Step 1: Calculation of Normal Profit:

Normal profit= Capital employed * [ Normal rate of return/100]

= 80000* [15/100]

= 12000

Step 2: Calculation of Average Profit:

Average Profit= [ 17000+20000+23000]/3

= 20000

Step 3: Calculation of Super Profit:

Super Profit= Average Profit- Normal Profit

= 20000-12000

= 8000

Step 4: Calculation of Goodwill:

Goodwill= 8000* 2

= 16000