The net profits of a company after providing for taxation for the past Rs.years are 2006: 37 lakh; 2007: Rs.42 lakh; 2008: Rs.44 lakh; 2009: Rs.47 lakh and 2010: Rs.50 lakh.
The capital employed in the business is Rs.4 crore, on which a reasonable rate of return of 10% is expected. It is expected that the company will be able to maintain its super profits for the next 5 years.
i.Calculate the value of the goodwill of the business on the basis of an annuity of super profits, taking the present value of Rs.1 for the 5 years at 10% interest as Rs.3.78.
ii.How would your answer differ if the goodwill is valued by capitalizing the excess of the annual profits over the reasonable return on capital employed on the basis of the same return of 10%?
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