Residual Value

AAA

DEFINITION of 'Residual Value'

How much a fixed asset is worth at the end of its lease, or at the end of its useful life.
If you lease a car for three years, its residual value is how much it is worth after three years. The residual value is determined by the bank that issues the lease before the lease begins. It is based on past models and future predictions. It is an important factor in determining the car's monthly lease payments (the other factors are the interest rate and tax). In capital budgeting projects, residual values reflect how much you can sell the asset for after the firm has finished using it or once the asset-generated cash flows can no longer be accurately forecasted.

VIDEO

Loading the player...

BREAKING DOWN 'Residual Value'

If you are a business owner, let's say your desk has a useful life of seven years. How much the desk is worth at the end of seven years (its fair market value as determined by agreement or appraisal) is its residual value (also known as salvage value). To manage asset-value risk, companies that have lots of expensive fixed assets (e.g., machine tools, vehicles, medical equipment) may purchase residual value insurance to guarantee the value of properly maintained assets at the ends of their useful lives.

RELATED TERMS
  1. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses ...
  2. Lease

    A legal document outlining the terms under which one party agrees ...
  3. Salvage Value

    The estimated value that an asset will realize upon its sale ...
  4. Useful Life

    An estimate of how long one can expect to use an income-producing ...
  5. Finance

    The science that describes the management, creation and study ...
  6. Appraisal

    A valuation of property (ie. real estate, a business, an antique) ...
Related Articles
  1. Economics

    Explaining Residual Value

    Residual value is a measurement of how much a fixed asset is worth at the end of its lease, or at the end of its useful life.
  2. Active Trading

    An Introduction To Depreciation

    Companies make choices and assumptions in calculating depreciation, and you need to know how these affect the bottom line.
  3. Forex Education

    Depreciation: Straight-Line Vs. Double-Declining Methods

    Appreciate the different methods used to describe how book value is "used up".
  4. Home & Auto

    New Wheels: Lease Or Buy?

    These two major ways to obtain a car have very different advantages and drawbacks. Find out which is best for you.
  5. Charts & Patterns

    Understand How Square Works before the IPO

    Square is reported to have filed for an IPO. For interested investors wondering how the company makes money, Investopedia takes a look at its business.
  6. Technical Indicators

    4 Ways to Find a Penny Stock Worth Millions

    Thinking of trading in risky penny stocks? Use this checklist to find bargains, not scams.
  7. Professionals

    Chinese Slowdown Affects Iron Ore Market

    The Chinese economy's ongoing slowdown is having a major impact on iron ore demand.
  8. Investing Basics

    Why do Debt to Equity Ratios Vary From Industry to Industry?

    Obtain a better understanding of the debt/equity ratio, and learn why this fundamental financial metric varies significantly between industries.
  9. Personal Finance

    How To Get That Entry-Level Financial Analyst Job

    Landing a job as a financial analyst takes study, strategy and a lot of hard work. Here's how to hone your competitive edge.
  10. Personal Finance

    Does It Make Sense to Go to College in Europe?

    If you're deciding whether to get a degree abroad, first do your research and talk to alumni who have completed the same program.
RELATED FAQS
  1. How is residual value of an asset determined?

    The residual value of an asset is determined by considering the estimated amount that an asset's owner would earn by disposing ... Read Full Answer >>
  2. How is residual value of assets taxed?

    Residual value has several meanings, each with its own potential tax consequences. Tax laws vary between jurisdictions, so ... Read Full Answer >>
  3. What is the importance of residual value in an automobile lease?

    The residual value of a car is often used by banks and auto dealerships to determine how much to charge per month for a lease. ... Read Full Answer >>
  4. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  5. What are some examples of general and administrative expenses?

    In accounting, general and administrative expenses represent the necessary costs to maintain a company's daily operations ... Read Full Answer >>
  6. How do dividend distributions affect additional paid in capital?

    Whether a dividend distribution has any effect on additional paid-in capital depends solely on what type of dividend is issued: ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Financial Crisis

    A situation in which the value of financial institutions or assets drops rapidly. A financial crisis is often associated ...
  2. Election Period

    The period of time during which an investor who owns an extendable or retractable bond must indicate to the issuer whether ...
  3. Shanghai Stock Exchange

    The largest stock exchange in mainland China, the Shanghai Stock Exchange is a nonprofit organization run by the China Securities ...
  4. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, followed by the continuation of the downtrend. A dead cat bounce ...
  5. Bear Market

    A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment ...
  6. Alligator Spread

    An unprofitable spread that occurs as a result of large commissions charged on the transaction, regardless of favorable market ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!