Question

A business has earned average profit of ₹ 1,00,000 during the last few years. Find out the value of goodwill by capitalisation method, given that the assets of the business are ₹ 10,00,000 and its external liabilities are ₹ 1,80,000. The normal rate of return is 10%.

Answer 1

Goodwill = Capitalised Value of Average Profits - Actual Capital Employed

Capitalised Value of Average Profit

= Average Profit x `100/"Nominal Rate of Return"`

= 1,00,000 x `10/100` = Rs. 10,00,000

Actual Capital Employed = 10,00,000 - 1,80,000 = Rs. 8,20,000.

Goodwill = 10,00,000 - 8,20,000 = Rs. 1,80,000.