Q.A firm has a capital employed of ₹10,00,000 and the normal rate of return in this line of business is 10%. The firm's average profit is ₹1,30,000. Find the value of goodwill at 3 years' purchase of the super profit.

Not all of the average profit represents goodwill — only the amount by which it exceeds what this level of capital would normally be expected to earn is treated as super profit and used for the goodwill calculation.

Step 1 — Compute Normal Profit:

Normal Profit = Capital Employed × Normal Rate of Return = 10,00,000 × 10% = ₹1,00,000

Step 2 — Compute Super Profit:

Super Profit = Average Profit − Normal Profit = 1,30,000 − 1,00,000 = ₹30,000 …

Cross-check by working forward: if goodwill is ₹90,000 for 3 years' purchase, the implied super profit is 90,000 ÷ 3 = 30,0 …

A frequent mistake is subtracting Average Profit from Normal Profit (giving a negative figure) instead of Normal Profit from Average Profit. Also check the rate is applied …