Residual Value
Candlefocus EditorThe concept of residual value was developed to help determine the worth of an asset at the end of its useful life or lease term. The asset’s residual value is the amount of money that a company can expect to receive in exchange for the sale of the asset at the end of the lease period. Generally, the usable life or lease period is related to the residual value of an asset. The shorter the life expectancy, the lower the residual value.
Residual value is important for finance and accounting professionals, who use the concept to help determine the depreciation value of an asset over its useful life or lease period. The asset’s residual value is often subtracted from the cost of the asset to calculate the total depreciable amount. The remaining amount is then divided into equal parts and spread out over the remaining years of the asset’s useful life or lease period.
For example, if a company buys a vehicle for $50,000 and the residual value of the vehicle is expected to be $10,000 after three years, the company would subtract the residual value from the cost of the vehicle, leaving them with $40,000 in total depreciable amount. The remaining $40,000 would be spread out over the remaining three years of the asset’s life.
In addition, residual value can also be used to calculate the rate of return on a loan or investment. For example, if a company invests $100,000 into a project with a projected residual value of $120,000, the rate of return would be 20% ($20,000 divided by $100,000).
In conclusion, the residual value of an asset is the amount of money that a company can expect to receive in exchange for the sale of the asset at the end of its useful life or lease period. Companies benefit from understanding an asset’s residual value because it helps them determine the depreciation value of the asset and calculate their rate of return. It is important to note that the residual value of an asset is generally directly related to its useful life or lease period.