A:

For the purposes of business accounting or financial management, the terms residual value and terminal value refer to the same concept. The only major difference between the two is context; residual value tends to be used in some circumstances and terminal value in other circumstances. An easy way to think of terminal or residual value is the anticipated value of an asset on some future date, such as a maturity date.

Contextual Differences

You can swap out terminal value and residual value under any circumstances, but there are some contexts in which it is more common to use one than the other. If an investor or analyst is trying to predict the future value of free cash flows to a business (see methods of calculating free cash flow), he is more likely to refer to terminal value.

Residual value is usually used for smaller or more specific assets, such as a car lease or a particular piece of business equipment.

Another way to look at the difference is terminal value normally refers to the value of an asset or entity at the end of an investment period, while residual value, or salvage value, normally refers to an asset at the end of its useful life.

Future Cash Flows and Future Value

Residual values and terminal values are calculated by discounting the future rents, or cash flows, to an asset. The operating assumption is an asset could be sold in the market for the value of its future returns after accounting for future uncertainty and inflation.

RELATED FAQS
  1. What is the difference between residual income and operational income?

    Understand the key factors that go into calculating operational and residual income, as well as what each of these categories ... Read Answer >>
  2. What is the importance of residual value in an automobile lease?

    Find out how dealerships assign residual value and why this is an important factor in car leases. Learn about a tactic some ... Read Answer >>
  3. When and why should the terminal value be discounted?

    Find out why investors use the terminal value, why the terminal value is discounted to the present day, and how it's related ... Read Answer >>
  4. What can cause the terminal growth rate to be negative?

    Learn about the assumptions built into terminal valuations and in what circumstances the applied terminal growth rate might ... Read Answer >>
  5. When evaluating terminal value, should I use the perpetuity growth model or the exit ...

    Examine the important calculation of a terminal value in discounted cash flow analysis, and learn which method of calculating ... Read Answer >>
Related Articles
  1. Financial Advisor

    Active Risk vs. Residual Risk: Differences and Examples

    Active risk and residual risk are common risk measurements in portfolio management. This article discusses them, their calculations and their main differences.
  2. Investing

    What Is The Intrinsic Value Of A Stock?

    Intrinsic value reduces the subjective perception of a stock's value by analyzing its fundamentals.
  3. Investing

    Learn The Lingo Of Private Equity Investing

    Because of the non-public nature of private equity, it can be difficult to the learn the lingo. We break it down here.
  4. Investing

    Market Value Versus Book Value

    Understanding book value and market value is helpful in determining a stock's valuation and how the market views a company's growth prospects in the future.
  5. Investing

    Investment Value Vs. Fair Market Value: How They Differ

    Learn about the differences between an asset's investment value and its fair market value, including why many think fair market value is unrealistic.
  6. Investing

    Why Do Some Failed Mergers Result in Break-Up Fees?

    When mergers go bad, there's often a break-up fee involved of as high as 3-5% of the value of the proposed merger.
  7. Investing

    Enhance Your Portfolio With Active Equity

    This strategy provides the potential for larger returns while using less capital.
  8. Investing

    Book Value: How Reliable Is It For Investors?

    In theory, a low P/B ratio means you have a cushion against poor performance. In practice, it is much less certain.
  9. Investing

    What's Fair Value?

    Fair value has three different meanings depending on the context.
RELATED TERMS
  1. Residual Value

    How much a fixed asset is worth at the end of its lease, or at ...
  2. Terminal Value - TV

    The value of a bond at maturity, or of an asset at a specified, ...
  3. Abnormal Earnings Valuation Model

    The abnormal earnings valuation model is a method for determining ...
  4. Notice of Termination

    A notice of termination refers to how an employer notifies an ...
  5. Present Value - PV

    The current worth of a future sum of money or stream of cash ...
  6. Asset Valuation

    A method of assessing the worth of a company, real property, ...
Hot Definitions
  1. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  2. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  3. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
  4. Monte Carlo Simulation

    Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted ...
  5. Price Elasticity of Demand

    Price elasticity of demand is a measure of the change in the quantity demanded or purchased of a product in relation to its ...
  6. Sharpe Ratio

    The Sharpe ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk.
Trading Center