A business has earned average profits of Rs. 1,00,000 during the last few years and the normal rate of return in a similar business is 25%. Ascertain the value of goodwill by capitalisation of average profits method, given that the value of net assets of the business is Rs. 3.20.000.

The correct option is Rs. 80,000.

To understand why this is the correct answer, let us break down the capitalization of average profits method for calculating goodwill step-by-step.

Step 1: Identify the given data
We are given the following values from the problem:
1. Average Profits of the business = Rs. 1,00,000
2. Normal Rate of Return = 25% (or 0.25)
3. Net Assets (Capital Employed) of the business = Rs. 3,20,000

Step 2: Calculate the Capitalized Value of Average Profits
The capitalized value represents the total capital needed to earn the given average profits at the normal rate of return. The formula is:

$$\text{Capitalized Value of Average Profits}=\frac{\text{Average Profits}}{\text{Normal Rate of Return}}\times 100$$
Substituting the given values into the formula:

$$\text{Capitalized Value}=\frac{1,00,000}{25}\times 100=\text{Rs.}4,00,000$$

Step 3: Calculate the Goodwill
Goodwill is the excess of the Capitalized Value of Average Profits over the Net Assets (Capital Employed) of the business. The formula is:

$$\text{Goodwill}=\text{Capitalized Value of Average Profits}-\text{Net Assets}$$
Substituting our calculated value and the given net assets:

$$\text{Goodwill}=4,00,000-3,20,000=\text{Rs.}80,000$$
Thus, the value of goodwill of the business is Rs. 80,000.