The average profit of a business over last five year amounted to Rs 16...
Calculation of Net Capital Invested in Business
Given:
- Average profit over the last five years = Rs 165,000
- Normal rate of return = 10% per annum
- Goodwill value = Rs 82,500
- Goodwill is based on 3 years of super profit
Step 1: Calculate Super Profit
- Normal profit = Rs 165,000 / 0.10 = Rs 1,650,000
- Super profit = Rs 1,650,000 - Rs 165,000 = Rs 1,485,000
Step 2: Calculate Capitalization of Goodwill
- Goodwill = Super profit x Number of years
- Goodwill = Rs 1,485,000 x 3 = Rs 4,455,000
Step 3: Calculate Net Capital Invested
- Net Capital Invested = Goodwill + Capital Employed
- Net Capital Invested = Rs 82,500 + Capital Employed
Step 4: Calculate Capital Employed
- Capital Employed = Normal profit / Normal Rate of Return
- Capital Employed = Rs 1,650,000 / 0.10 = Rs 16,500,000
Step 5: Calculate Net Capital Invested
- Net Capital Invested = Rs 82,500 + Rs 16,500,000
- Net Capital Invested = Rs 16,582,500
Therefore, the net capital invested in the business is Rs 16,582,500.
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