Residual Value

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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.

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.

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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 >>
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