Question

Average profits of a firm during the last few years were ₹ 3,20,000. The normal rate of return in a similar business is 10%. If the goodwill of the firm is ₹ 8,00,000 at four years purchase of super profit, find the capital employed by the firm.

Answer 1

1. Calculate Super Profit:

Goodwill = Super Profit × Number of years’ purchase

8,00,000 = Super Profit × 4

Super Profit = `(8,00,000)/4`

= 2,00,000

2. Calculate Normal Profit:

Super Profit = Average Profit − Normal Profit

2,00,000 = 3,20,000 − Normal Profit

Normal Profit = 3,20,000 − 2,00,000

= 1,20,000

3. Calculate Capital Employed:

Normal Profit = Capital Employed × Normal Rate of Return

1,20,000 = `"Capital Employed" × 10/100`

Capital Employed = 1,20,000 × 10

= 12,00,000