What is a Residual Value?

Answer:
A residual value is the price that

a company believes they can sell a fixed asset for at the end of a specified term or the asset’s useful life. Residual value is a term you’ll hear when leasing equipment or vehicles.

In the case of a leased car, the residual value refers to how much the car is expected to be worth at the end of the lease’s term. For example, if you are leasing a $25,000 car for three years, the lender will calculate a residual value based on past data and predictions.

Let’s say the residual value comes out to $15,000. In a lease, you pay for the value of the car that you use during the lease’s term and then surrender the car back to the lender or purchase it at the residual value. During the lease, you would finance $10,000. At the end of the lease, the lender will have received the $10,000 plus interest and it will get the $15,000 car back which it will sell to someone else (or you if you love the car).

Residual value in accounting is also called the salvage value which is the value of an asset once it has been fully depreciated.