capitalisation method of valuation of Goodwill
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Capitalization Method
(i) Capitalization of Average Profits: Under this method, the value of goodwill is calculated by deducting the actual capital employed from the capitalized value of the average profits on the basis of the normal rate of return.
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In the annuity method, goodwill can be calculated by taking average super profit. This particular profit is the value of an annuity over a certain number of years. Computation of the present value of this annuity is done by discounting it at the given rate of interest, i.e. on the normal rate of return.
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