Question

Find the solution.


A business firm whose capital is ₹80,000. The average profit of the firm is 9,000.

The normal rate return on such business is 7½.. Find out the value of goodwill on the basis of capitalized method.










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Answer 1

Given:

A business firm whose capital is ₹80,000. The average profit of the firm is 9,000. The normal rate return on such business is 7½. Find out the value of goodwill on the basis of the capitalized method.

To find:

The value of goodwill on the basis of the capitalized method.

Solution:

The capital employed by the business firm = ₹ 80,000

The average profit of the firm = ₹ 9,000

The normal rate of return = 7½% = $\frac{15}{2} \%$

We know that,

$\boxed{\bold{Capitalised \:value\:of\:profit = \frac{Avg. \:Profit}{Normal \:rate\:of\:return}\times 100 }}$

Therefore,

The capitalised value of profit of the firm is,

= $\frac{9000}{\frac{15}{2} } \times 100$

= $\frac{9000\times 2}{15} \times 100$

= $\frac{18000}{15} \times 100$

= $1200 \times 100$

= $1,20,000$

Now,

The value of goodwill is,

= [Capitalised value profit] - [Actual capital employed]

= $120000 - 80000$

= ₹ $\bold{40000}$

Thus, the value of the goodwill on the basis of the capitalised method is → ₹ 40000.

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