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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%.
Solution
Goodwill = Capitalised Value of Average Profits - Actual Capital Employed
Capitalised Value of Average Profit
= Average Profit x `100/"Nominal Rate of Return"`
= 1,00,000 x `10/100` = Rs. 10,00,000
Actual Capital Employed = 10,00,000 - 1,80,000 = Rs. 8,20,000.
Goodwill = 10,00,000 - 8,20,000 = Rs. 1,80,000.
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What are the methods of valuation of goodwill?
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