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

$$\begin{gathered} \mathrm{Goodwill}=\mathrm{Capitalised}\mathrm{Value}\mathrm{of}\mathrm{Average}\mathrm{Profits}-\mathrm{Actual}\mathrm{Capital}\mathrm{Employed} \\ \begin{array}{c}\begin{array}{rcl}\mathrm{Capitalised}\mathrm{Value}\mathrm{of}\mathrm{Average}\mathrm{Profit}& =& \mathrm{Average}\mathrm{Profit}\times \frac{100}{\mathrm{Nominal}\mathrm{Rate}\mathrm{of}\mathrm{Return}}\\ & =& 1,00,000\times \frac{100}{10}=10,00,000\end{array}\end{array} \\ \mathrm{Actual}\mathrm{Capital}\mathrm{Employed}=10,00,000-1,80,000=8,20,000 \\ \mathrm{Goodwill}=10,00,000-8,20,000=\mathrm{Rs}1,80,000 \end{gathered}$$