Residual value – sometimes referred to as salvage value -- is the amount an asset is worth at the end of its estimated useful life. When the asset is leased, the residual value is the asset’s worth at the end of the lease term.In a lease situation, the bank or lending institution financing the lease determines the residual value. This in turn, affects the monthly lease payment amount. Generally, the higher the estimated residual value, the lower the lease payment. For businesses that own fixed assets, residual value is important in determining a fixed asset’s periodic depreciation because the residual value is subtracted from the depreciable base. For instance, XYZ Corp purchases a desk for $5000. The desk has an estimated useful life of five years, at the end of which XYZ expects to be able to sell the desk for $500. The cost basis for depreciating this desk is $4,500 -- the $5,000 cost minus the $500 estimated residual value. Thus, yearly depreciation will be $900 ($4,500/5). Residual value is often very hard to estimate accurately. For a company that owns and operates many expensive fixed assets, there is always risk that the residual value estimation was wrong, and thus what was thought to be a profitable capital purchase decision was actually an unprofitable one. To mitigate this risk, a company may buy residual value insurance to lock-in the residual value of their properly maintained fixed assets.