Residual Value
What is Residual Value?
Residual Value is the estimated value of an asset at the end of its useful life or lease term. It represents how much the asset is expected to be worth after it has been used for a certain period.
In accounting, finance, and leasing, residual value is used to calculate depreciation, lease payments, and investment returns.
Where it’s used?
1. Depreciation Accounting
When a company buys an asset (e.g., machinery or a vehicle), it estimates the residual value to calculate how much cost to spread over the asset’s useful life.
2. Leasing
In leasing, residual value is the expected market value of the leased asset when the lease ends. It helps determine monthly lease payments.
3. Valuation and Investment Analysis
In financial modeling, residual value can refer to the terminal value of an asset or project beyond a forecast period.
Example – Accounting
A company buys a machine for ₹10 lakh with a useful life of 10 years. It expects to sell it for ₹1 lakh at the end.
Residual value = ₹1 lakh
Depreciable amount = ₹10 lakh – ₹1 lakh = ₹9 lakh
Annual depreciation = ₹90,000 (using straight-line method)
Example – Car Leasing
If a car is leased for 3 years and its expected value at the end of the lease is ₹5 lakh, that ₹5 lakh is the residual value. The lease payments are based on the difference between the purchase price and residual value.
Why Residual Value Matters?
- Helps spread asset costs accurately over time
- Affects lease pricing and investment decisions
- Influences buy vs lease comparisons
- Impacts asset management and resale strategies
Factors That Affect Residual Value
- Asset type and quality
- Usage pattern and wear-and-tear
- Maintenance and servicing
- Market demand and technology changes
- Economic and regulatory conditions
In Indian Context
In India, residual value is widely used in:
- Car and equipment leasing
- Plant and machinery accounting
- Investment banking for DCF models (terminal value)
- Real estate and infrastructure projects
Tax rules in India (under the Income Tax Act) also consider residual value when setting depreciation rates for different asset classes.