Given Information:
- Average Profits = Rs 1,00,000
- Super Profits = Rs 18,000
- Normal Rate of Return = 10%
Formula for Capitalization of Super Profit Method:
Goodwill = Normal Rate of ReturnSuper Profit×100
Calculation:
Goodwill = 1018,000×100
Goodwill = 1018,00,000
Goodwill = Rs 1,80,000
Understanding the concept: The capitalization of super profit method treats super profit as a perpetual income stream. By capitalizing it at the normal rate of return, we find the present value of this perpetual super earning capacity, which represents the firm's goodwill.
In simpler terms, we're asking: "What capital amount, when invested at 10% normal return, would generate Rs 18,000 annually?" That amount is the goodwill value.
The correct answer is Option 3: Rs 1,80,000