Q.A firm's average profit is ₹1,50,000 and its net capital employed is ₹12,00,000. The normal rate of return in similar businesses is 10%. Find the value of goodwill by capitalizing the average profit.

Capitalizing the average profit tells us what total capital this level of profit would justify at the normal rate of return; goodwill is simply the amount by which that justified capital exceeds what is actually invested in the business.

Step 1 — Compute the Capitalized Value of the business:

Capitalized Value = Average Profit × (100 ÷ Normal Rate of Return) = 1,50,000 × (100 ÷ 10) = 1,50,000 × 10 = ₹15,00,000

Step 2 — Compare with actual Capital Employed: …

Cross-check using the Super Profit route: Normal Profit = 12,00,000 × 10% = 1,20,000; Super Profit = 1,50,000 − 1,20,000 = 30,000; Capitalizing this super profit gives 30,000 × (100÷10) = 3,00, …

A common error is subtracting in the wrong direction (Capital Employed − Capitalized Value), which gives a negative number. Goodwill under this method is always Capitalized Value MINUS Capital Employed, since the capi …