Calculation of Average Profit:
Total Profits for 5 years = Rs. 20,000 + Rs. 24,000 + Rs. 20,000 + Rs. 20,000 + Rs. 16,000 = Rs. 1,00,000
Average Profit = Number of YearsTotal Profits = 51,00,000 = Rs. 20,000
Calculation of Goodwill:
Goodwill = Average Profit × Number of Years' Purchase
Goodwill = Rs. 20,000 × 3 = Rs. 60,000
The value of goodwill is Rs. 60,000.
Note: "3 years' purchase" means the goodwill is calculated by multiplying the average profit by 3. This represents the buyer's willingness to pay 3 times the annual average profit for the firm's reputation and earning capacity.