Question

Value of Goodwill of a firm at 3 years’ purchase of Super Profits is ₹ 3,75,000. Average Capital Employed in the firm is ₹ 15,00,000. Profits of the last 3 years are:

2022-23	₹ 1,00,000 (Loss)
2023-24	₹ 5,35,000 Profit
2024-25	₹ 4,80,000 Profit

Find out the Normal Rate of Return.

Answer 1

Given:

Goodwill = ₹ 3,75,000

Goodwill is based on 3 years’ purchase of Super Profits.

Average Capital Employed = ₹ 15,00,000

Profits of last 3 years:

2022-23 = ₹ (1,00,000) (loss)

2023-24 = ₹ 5,35,000

2024-25 = ₹ 4,80,000

Average Profit = `((-1,00,000) + 5,35,000 + 4,80,000)/3`

= `(9,15,000)/3`

= 3,05,000

Goodwill = Super Profit × Number of Years’ Purchase

3,75,000 = Super Profit × 3

Super Profit = `(3,75,000)/3`

= 1,25,000

Super Profit = Average Profit − Normal Profit

1,25,000 = 3,05,000 − Normal Profit

Normal Profit = 3,05,000 − 1,25,000

= 1,80,000

NRR (%) = `("Normal Profit")/"Capital Employed" xx 100`

= `(1,80,000)/(15,00,000) xx100`

= 12%