Average Profit Calculation:
Total profits for 5 years = Rs. 40,000 + Rs. 50,000 + Rs. 55,000 + Rs. 70,000 + Rs. 85,000 = Rs. 3,00,000
Average Profit = Number of YearsTotal Profits = 53,00,000 = Rs. 60,000
Normal Profit Calculation:
Normal Profit = Capital Employed × Normal Rate of Return
Normal Profit = Rs. 5,00,000 × 10010 = Rs. 50,000
This represents the profit that any business with this capital should normally earn at the market rate.
Super Profit Calculation:
Super Profit = Average Profit - Normal Profit
Super Profit = Rs. 60,000 - Rs. 50,000 = Rs. 10,000
Super profit represents the excess earnings above normal expectations, which is the basis for goodwill valuation.
Goodwill Calculation:
Goodwill = Super Profit × Number of Years' Purchase
Goodwill = Rs. 10,000 × 2 = Rs. 20,000
The answer is Option 1: Rs. 20,000