Question

The capital of a firm of Arpit and Prajwal is Rs. 10,00,000. The market rate of return is 15% and the goodwill of the firm has been valued Rs. 1,80,000 at two years purchase of super profits. Find the average profits of the firm.

Answer 1

(i) Super profit = Value of goodwill /Number of years purchase

= (180000/2) = 90000

(ii) Normal Profit = Capital employed X Normal rate of return /100

= (1000000 X 15/ 100) = 150000

(iii) Average Profit = Normal Profit + Super profit

= 150000 + 90000 = 240000