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.

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