The profits of Mahesh and Co. for the last five years were: 2005 �

1.	The profits of Mahesh and Co. for the last five years were: 2005 – Rs. 35,000 2006 – Rs. 30,000 2007 – Rs. 27,500 2008 – Rs.25,000 2009 – Rs.20,000 The capital employed in the firm is Rs. 5,00,000. You are required to calculate the good will at 3 years purchase of super-profits. The normal rate of return on capital employed is 5%
Answer» Average profit = \(\frac{35000+30000+27500+25000+20000}{5}\) = 27500 Capital employed = 500000 Normal Profit = Capital employed x Normal Rate of Return = 500000 x 5/100 = 25000 Super Profit = Average Profit – Normal Profit = 27500 – 25000 = 2500 Goodwill = Super profit x No. of years purchase = 2500 x 3 = 7500

The profits of Mahesh and Co. for the last five years were: 2005 – Rs. 35,000 2006 – Rs. 30,000 2007 – Rs. 27,500 2008 – Rs.25,000 2009 – Rs.20,000 The capital employed in the firm is Rs. 5,00,000. You are required to calculate the good will at 3 years purchase of super-profits. The normal rate of return on capital employed is 5%

Answer»

Average profit = \(\frac{35000+30000+27500+25000+20000}{5}\) = 27500

Capital employed = 500000

Normal Profit = Capital employed x Normal Rate of Return

= 500000 x 5/100 = 25000

Super Profit = Average Profit – Normal Profit

= 27500 – 25000 = 2500

Goodwill = Super profit x No. of years purchase

= 2500 x 3 = 7500