In leasing, a key activity that must not be taken lightly is how to value your residuals. (Residual value is the value of the leased asset at the end of the lease transaction).
Residual value analysis is a comprehensive process aimed at determining the future value of equipment at specified times during the lease term and at expiration. The issue of residual value is very crucial in leasing. In operating lease (this is lease whose intention is not to own the asset at the end of the lease term) for example, the lessor (owner of the asset) is more likely to rely upon the future value of the leased asset for its profit, as the lessee’s (user of asset) ability to pay the lease rental (this is the fee the lessee pays the lessor for use of the asset).
However, care must be taken in assessing the residual value. For instance, an over estimated value will cause the lessor to lose an element of its initial capital expenditure.
Generally, the following factors must be put into consideration in residual valuation.
- Inflation – the rate of inflation must be considered because this would affect replacement cost of assets in future.
- Technological obsolescence
- Useful life of asset
- Rate of usage of asset
- Rental payment
- Secondary market
Generally, consultation with used equipment experts and product people, may help to figure out the worth of the equipment at the end of lease terms. Residual calculation is an art not a science. Therefore, it is not probable that a single formula for calculating residual could be formulated. Lessors would have to depend on their experience on each particular product and the economic situation both now and in the future in fixing residuals.
Based on the above, we kindly recommend that you maximise the opportunity of the ELAN initiative “Ask ELAN” to get a one-on-one solution approach on this area or any other area of interest to you, that would lead to better organisational performance in leasing. Would you want to visit us or we visit you? Kindly contact us on 08023176691, info@elannigeria.org