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Question
From the following information, calculate the value of goodwill under the annuity method:
| Particulars | ₹ |
| Average profit | 14,000 |
| Normal Profit | 4,000 |
| Normal rate of return | 15% |
| Years of purchase of goodwill | 5 |
Present value of ₹ 1 for 5 years at 15% per annum as per the annuity table is 3.352
Solution
Super profit = Average profit – Normal profit
= 14,000 – ₹ 4,000
= ₹ 10,000
Goodwill = Super profit × Present value of annuity factor
= ₹ 10,000 × 3.352
= ₹ 33,520
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