A business earned an average profit of Rs 1,80,000

 20 :-  A business earned an average profit of Rs 1,80,000 during the last few years. Average capital employed by the firm is Rs 12,50,000. If goodwill of the firm is valued at Rs 1,60,000 at 2 years purchase of super profit, find normal rate of return.

Solution:-  Goodwill = Super profit x No. of years purchased
                   1,60,000 = (Average profit – Normal profit) x No. of years purchased
                   1,60,000 = [1,80,000 – (Capital Employed x Normal rate of return)] x 2
              1,60,000/2 = 1,80,000 – (12,50,000 x Normal rate of return)
                    80,000 = 1,80,000 – (12,50,000 x Normal rate of return)
               12,50,000 x Normal rate of return = 1,80,000 – 80,000
                Normal rate of return = 1,00,000/12,50,000
              Normal rate of return = 0.08 = 8%