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Question
Gupta and Bose had a firm in which they had invested ₹ 50,000. On an average, the profits were ₹ 16,000. The normal rate of return in the industry is 15%. Goodwill is to be valued at four years' purchase of profits in excess of profits @ 15% on the money invested. Calculate the value goodwill.
Solution
Goodwill = Super Profit x Number of Years Purchase
Normal Profit = Capital Employed x `"Normal Rate Return"/100`
= 50,000 x `15/100` = Rs. 7,500.
Actual Profit = Rs. 16,000
Super Profit = Actual Profit - Normal Profit
= 16,000 - 7,500 = Rs. 8,500.
Number of years’ purchase = 4
∴ Goodwill = 8,500 x 4 = Rs. 34,000.
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