Given Information:
- Average Profits = Rs. 1,00,000
- Normal Rate of Return = 25%
- Net Assets = Rs. 3,20,000
Under the Capitalisation of Average Profits Method, the total value of the business is determined by capitalising the average profits at the normal rate of return.
Capitalised Value of Business = Average Profits × Normal Rate of Return100
Capitalised Value of Business = 1,00,000 × 25100
Capitalised Value of Business = 1,00,000 × 4 = Rs. 4,00,000
Goodwill = Capitalised Value of Business - Net Assets
Goodwill = 4,00,000 - 3,20,000 = Rs. 80,000
The capitalised value (Rs. 4,00,000) represents what the business should be worth based on its profit-earning capacity. Since the actual net assets are only Rs. 3,20,000, the difference of Rs. 80,000 represents the value of goodwill - the premium paid for the business's superior earning capacity.
Answer: Option 1 - Rs. 80,000