Question

The Goodwill of a firm is Rs 30,000, when it is valued at three years' purchase of the super profits of the business. Find the normal rate of return, if the firm's capital employed is Rs 5,00,000 and average profits of last five years were Rs 60,000.

• A. 5%
• B. 10%
• C. 15%
• D. 20%

Hint:

Super profit = Goodwill / 3 = Rs 10,000. Normal profit = Average profit - Super profit.

Answer 1

The Correct Option is B

Step 1: Understand the concept.
Under the super profit method, Goodwill = Super Profit \(\times\) Number of years' purchase. Super Profit = Average Profit - Normal Profit. Normal Profit = Capital Employed \(\times\) Normal Rate of Return / 100.
Here the goodwill is known, so we work backwards to the normal rate.

Step 2: Find the super profit.
Goodwill = Super Profit \(\times\) 3.
\[ 30{,}000 = \text{Super Profit} \times 3 \]
\[ \text{Super Profit} = \frac{30{,}000}{3} = 10{,}000 \]

Step 3: Find the normal profit.
Normal Profit = Average Profit - Super Profit.
\[ = 60{,}000 - 10{,}000 = 50{,}000 \]

Step 4: Find the normal rate of return.
\[ \text{Normal Rate} = \frac{\text{Normal Profit}}{\text{Capital Employed}} \times 100 = \frac{50{,}000}{5{,}00{,}000} \times 100 = 10\% \]

Step 5: Check the options.
5% would give a normal profit of Rs 25,000 and a super profit of Rs 35,000, so goodwill would be Rs 1,05,000. 15% would give a normal profit of Rs 75,000, which is more than the average profit, so there would be no super profit. 20% is even higher and also gives no super profit. Only 10% gives goodwill of Rs 30,000.

Final Answer:
The normal rate of return is 10%, which is option 2.
\[ \boxed{10\%} \]