Question

Capital invested in a firm is ₹ 5,00,000. Average profits of the firm are ₹ 64,000 (after an abnormal loss of ₹ 4,000). Value of goodwill at four times the super profits is ₹ 72,000. What is the normal rate of return?

Options

• 13.6%

• 8.4%

• 10%

• 9.2%

Answer 1

10%

Explanation:

Given:

Capital invested = ₹ 5,00,000

Average profits (after abnormal loss) = ₹ 64,000

Abnormal loss = ₹ 4,000

Goodwill (4 years’ purchase of super profits) = ₹ 72,000

Adjusted Average Profit = 64,000 + 4,000

= ₹ 68,000

Goodwill = 4 × Super Profits

72,000 = 4 × Super Profits

Super Profits = `(72,000)/4`

= ₹ 18,000

Super Profits = Adjusted Average Profits − Normal Profits

18,000 = 68,000 − Normal Profits

Normal Profits = 50,000

Normal Profits = Capital Employed `xx"NRR"/100`

50,000 = 5,00,000 `xx "NRR"/100`

NRR = `(50,000xx100)/(5,00,000)`

NRR = 10%