Question

The average profit for the last five years of a firm was ₹ 20,000. The normal rate of return in a similar business is 8\%. Goodwill of the firm is valued at ₹ 24,000 at the three years' purchase of super profit. Calculate the amount of capital employed by the firm.

Hint:

To calculate goodwill, first calculate the super profit, then multiply it by the number of years’ purchase to find the goodwill. Use the formula for normal profit to find capital employed.

Answer 1

To calculate the capital employed, we first determine the super profit: \[ \text{Super Profit} = \text{Average Profit} - \text{Normal Profit}. \] The normal profit is calculated as: \[ \text{Normal Profit} = \frac{\text{Normal Rate of Return}}{100} \times \text{Capital Employed}. \] Let the capital employed be \( C \). The super profit is: \[ \text{Super Profit} = ₹ 20,000 - \frac{8}{100} \times C. \] The goodwill is calculated as: \[ \text{Goodwill} = 3 \times \text{Super Profit}. \] Substituting the given values: \[ ₹ 24,000 = 3 \times \left( ₹ 20,000 - \frac{8}{100} \times C \right), \] \[ ₹ 24,000 = 60,000 - \frac{24}{100} \times C. \] Solving for \( C \): \[ \frac{24}{100} \times C = 60,000 - 24,000 = 36,000, \] \[ C = \frac{36,000 \times 100}{24} = ₹ 1,50,000. \]