Question : Capital invested in a firm is Rs.5,00,000. Normal rate of return is 10%. Average profits of the firm are 64,000 (after an abnormal loss of Rs.4,000). Value of goodwill at four times the super profits will be:
Option 1: Rs.72,000
Option 2: Rs.40,000
Option 3: Rs.2,40,000
Option 4: Rs.1,80,000
Correct Answer: Rs.72,000
Solution : Net Average Profit = Average Profits + Abnormal loss = Rs.64,000 + Rs.4,000 = Rs.68,000 Normal Profit = Capital employed X Normal Rate of Return = Rs.5,00,000 X 10% = Rs.50,000 Super Profit = Average Profit - Normal Profit = Rs.68,000 - Rs.50,000 = Rs.18,000 Goodwill = Super Profit X Number of years' purchase = Rs.18,000 X 4 = Rs.72,000 Hence, the correct option is 1.
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