Question

Gupta and Bose had a firm in which they had invested 50000. On an average, the profits were 16000. The normal profit of return in the industry is 15%. Goodwill is to be valued at four years' purchase of profit in excess of profit @15% on the money invested. Calculate the valued of goodwill.

Answer 1

ANSWER :-

Step 1: Calculation of Normal Profit:

Normal Profit=[Capital employed* Normal rate of Return]

= 50000* [15/100]

= 7500

Step 2: Calculation of average profit

Average profit= 16000

Step 3: Calculation of super profit

Super profit= Average profit- Normal profit

= 16000- 7500

= 8500

Step 4: Calculation of Goodwill

Goodwill= 8500* 4

= 34000