Q.A firm's profits for four years, showing a rising trend, were: 2020 – ₹1,00,000; 2021 – ₹1,20,000; 2022 – ₹1,30,000; 2023 – ₹1,50,000. The firm decides to value goodwill using the Weighted Average Profit Method, assigning weights 1, 2, 3, and 4 respectively to the four years. Calculate the goodwill at 3 years' purchase of the weighted average profit.

Because profits are rising steadily year after year, the most recent year is the best guide to future earnings, so each year's profit is weighted, giving the highest weight to the latest year, before the average is taken.

Step 1 — Multiply each year's profit by its weight:

Step 2 — Compute the Weighted Average Profit: …

Cross-check the simple average for comparison: (1,00,000+1,20,000+1,30,000+1,50,000) ÷ 4 = 5,00,000 ÷ 4 = 1,25,000, which is lower than the weighted average of 1,33,000 — as expected, si …

A very common error is dividing the total of (Profit × Weight) by the number of years (4) instead of the sum of the weights (10). The divisor must always …