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Annuity Method

Under this method, time value of money is considered. When money will be received at different points of time, its value should be different depending upon the rate of interest and hence, time value of money is used. Time value of money is the difference between the value of money at t (present date) and value of money at t1 (future date). A Present value factor is applied to the expected future profits to find out the present value of future profits. The Present value of future cash flows will be calculated as follows:


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Illustration 4:
 The expected profits of a firm for the next 5 years are as follows:


The total assets of the firm are ₹ 40,00,000 and outside liabilities are ₹ 22,00,000. The present value factor at 10% is as follows:

Required: Calculate the value of goodwill.





Value of goodwill = ₹ 14,48,134 ( present value of super profits of I + II + III + IV + V)

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