Question

The average profit for the last five years of a firm of Suman and Dhawan was ₹ 6,00,000. The normal rate of return in a similar business is 10\%. Goodwill of the firm is valued at ₹ 40,000, calculated by capitalizing super profit. Find out the amount of capital employed by the firm.

Hint:

The capital employed can be derived by capitalizing the super profit, which involves calculating the normal profit and subtracting it from the average profit.

Answer 1

The capital employed in the firm is calculated using the formula: \[ Goodwill} = \frac{Super Profit} \times Normal Rate of Return}}{100} \] To calculate the super profit: \[ Normal Profit} = \frac{Normal Rate of Return} \times Capital Employed}}{100} \] \[ Super Profit} = Average Profit} - Normal Profit} \] Let the capital employed be \( C \). \[ Super Profit} = 6,00,000 - \frac{10\% \times C}{100} = 6,00,000 - 0.10C \] Now, substituting in the goodwill formula: \[ 40,000 = \frac{6,00,000 - 0.10C}{10} \] \[ 40,000 \times 10 = 6,00,000 - 0.10C \] \[ 4,00,000 = 6,00,000 - 0.10C \] \[ 0.10C = 6,00,000 - 4,00,000 = 2,00,000 \] \[ C = \frac{2,00,000}{0.10} = 20,00,000 \] Thus, the capital employed in the firm is ₹ 20,00,000.