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.

INVESTOPEDIA EXPLAINS '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. Fair Market Value

    The price that a given property or asset would fetch in the marketplace, ...
  2. Salvage Value

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

    An estimate of how long one can expect to use an income-producing ...
  4. Lease

    A legal document outlining the terms under which one party agrees ...
  5. Walk-Away Lease

    A common type of car lease in which the lessee returns the car ...
  6. Closed-End Lease

    A rental agreement that puts no obligation on the lessee (the ...
Related Articles
  1. 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.
  2. Forex Education

    Depreciation: Straight-Line Vs. Double-Declining Methods

    Appreciate the different methods used to describe how book value is "used up".
  3. 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.
  4. Fundamental Analysis

    What is the difference between profitability and profit?

    Calculating company profit and profitability are not one and the same, and investors should understand the difference between the two terms.
  5. Fundamental Analysis

    Should companies break out accounts receivables into subledgers?

    Find out why every company that sells on credit should break down its accounts receivable into individual customer subsidiary ledgers, or subledgers.
  6. Investing

    What Happened To Obama’s Amnesty Bill?

    The sweeping Republican majorities were supposed to trigger change, but now they are preparing to embrace the Obama immigration policy.
  7. Fundamental Analysis

    What's a Prospectus?

    The Security and Exchange Commission (SEC) requires that any company raising money from potential investors through the sale of securities must file a prospectus with the SEC and then provide ...
  8. Fundamental Analysis

    What's a Tangible Asset?

    Tangible assets are property owned by a business that can be touched -- they physically exist. Examples include furniture and fixtures, computer hardware, delivery equipment, leasehold improvements ...
  9. Fundamental Analysis

    Cash Flow From Operating Activities

    Cash flow from operating activities is a section of the Statement of Cash Flows that is included in a company’s financial statements after the balance sheet and income statements.
  10. Fundamental Analysis

    What's Net Debt?

    Net debt is one of the many metrics used to measure a company’s ability to pay its debts. There are other metrics such as net liquidity ratio, cash conversion cycle and the debt to equity ratio, ...

You May Also Like

Hot Definitions
  1. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  2. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
  3. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
  4. Federal Funds Rate

    The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution ...
  5. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  6. Break-Even Analysis

    An analysis to determine the point at which revenue received equals the costs associated with receiving the revenue. Break-even ...
Trading Center