The goodwill is calculated using the formula:
Goodwill = Average Profit × Number of Years' Purchase
Calculating Average Profit:
Total Profit = Rs. 4,00,000 + Rs. 3,98,000 + Rs. 4,50,000 + Rs. 4,45,000 + Rs. 5,00,000
Total Profit = Rs. 21,93,000
Average Profit = Number of YearsTotal Profit = 5Rs. 21,93,000 = Rs. 4,38,600
Calculating Goodwill:
Number of Years' Purchase = 4 years
Goodwill = Rs. 4,38,600 × 4 = Rs. 17,54,400
The 4 years' purchase means the goodwill is valued at 4 times the average annual profit. This represents the price a buyer would pay for the firm's reputation and established customer base, calculated as four years' worth of the average profits earned.