Q.A firm's average profit is ₹1,80,000 per annum. The capital employed in the business is ₹10,00,000, and the normal rate of return in this class of business is 12%. Calculate the value of goodwill at three years' purchase of super profit.

First work out the normal profit the capital employed should earn at the normal rate; the excess over that is the super profit, which is then multiplied by the years' purchase.

Step 1 — Normal profit. Normal Profit = Capital Employed × Normal Rate of Return = ₹10,00,000 × 12% = ₹1,20,000.

Step 2 — Super profit. Super Profit = Average Profit − Normal Profit = ₹1,80,000 − ₹1,20,000 = ₹60,000.

Step 3 — Apply the Super Profit Method formula. Goodwill = Super Profit × Number of years' purchase = ₹60,000 × 3 = ₹1,80,000. …

A frequent error is multiplying the AVERAGE profit (₹1,80,000) directly by the years' purchase, skipping the super-profit step entirely — the Super Profit Method always requires first deducting the normal profi …