VALUATION OF GOODWILL

         Calculate the value of goodwill at 3 times the average profit of last 5 years. The profits were: 

Year	Profit / Loss Amount
2001 – 2002 2002 – 2003 2003 – 2004 2004 – 2005 2005 – 2006	`. 14,500    Profit `.   9,000    Loss `. 16,700    Profit `.   9,500    Profit `. 13,300    Profit

Solution:

Year	Total Profit	Total loss
2001-2002 2002-2003 2003-2004 2004-2005 2005-2006	14500 16700 9500 13300	9000
	54000	9000

      Average Profit =  Total Profit – Total Losses

                                       No. of years

                             =  54,000 – 9,000

                                      5

                             =  45000    =  9000

                                     5

Goodwill =  Average Profit ´ No. of years Purchase

              =    9,000   ´    3

              =  27,000