Question

The average net profit ( before making any adjustment for valuation of goodwill ) of a firm was Rs. 5,04,000 including Rs. 4,000 as income from investment. The cost of investment ( as also its present value ) was Rs. 80,000. Expected future reduction in expenditure is Rs. 10,000 per annum. The rate of income tax is 40% and 10% represents a fair commercial return. The average tangible capital employed was Rs. 26,83,200, but on valuations obtained, the capital employed was found to be Rs. 28,80,000. Ascertain value of goodwill on the basis of 5 years’ purchase of super profit.

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