A business has earned average profits of Rs.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 Rs.10,00,000 and its external liabilities are Rs. 1,80,000. The normal rate of return is 10%.

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Solution

Capital employed = Assets - External liabilities

= 10,00,000 - 1,80,000 = 8,20,000

Estimated capital required to earn average profit Rs. 1,00,000 @ Normal return 10%

= $1, 00, 000 \times \frac{100}{10} = 10, 00, 000$

Goodwill = Esimated capital - Actual capital (Capital employed)

= 10,00,000 - 8,20,000 = 1,80,000

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A business has earned average profits of Rs.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 Rs.10,00,000 and its external liabilities are Rs. 1,80,000. The normal rate of return is 10%.

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