Question

Average profits of a firm during the last few years are 7 80,000 and the
normal rate of return in a similar business is 10%. If the goodwill of the
1,00,000 at 4 years' purchase of super profit, find the capital
employed by the firm,​

Answer 1

Answer:

Capital employed  =  7,550,000

Explanation:

Goodwill  =  Super profits * No. of years of purchase

1,00,000  =  Super profits * 4

Super profits  =  1,00,000 / 4  =  25,000

Super profits  =  Actual profits - Normal profits

Super profits  =  Actual profits - Capital employed * Normal rate of return

25,000  =  780,000 - Capital employed * 10%

Capital employed  =  (780,000 - 25,000) / 10%

                               =  755,000 / 10%

                               =  7,550,000

Answer 2

Goodwill at 4 years purchase of super profit = $\sf{1,00,000}$

Super profit = $\sf{\frac{1,00,000}{4}=25,000}$

Average profit - Normal profit = Super profit

Normal profit = Average profit - Super profit

$\implies$$\sf{80,000-25000=55,000}$

Capital employed = $\sf{\frac{100}{NRR}×Normal \: profit}$

$\implies$$\sf{55,000 × \frac{100}{10}}$

$\implies$$\sf{5,50,000}$