How do you calculate the residual value of a property?

Whether in economics or accounting, the concept of residual value is frequently used, but it is not always easy to understand. For best accountancy training Best school of accountancy In Lahore. Here is a small article which will allow to see more clearly on its definition, its interests but also its calculation.

What is the residual value?

To define the residual value, many variants exist since each tries to adapt it to its activity. However, the following definition can be accepted: the residual value is "the estimated value of an acquisition at the end of the amortization period". It therefore corresponds to the value of a property after being used.

If the residual value is never negative, it can be zero, since it is completely possible for certain assets to have no longer any value after a certain period of use.

Applications of the residual value

For a very long time, residual value has been an essential element of the leasing contract, which has been a real success with the trend of car leasing. Indeed, leasing (or leasing with option to purchase) is a contract by which an individual rents a property which he can then acquire, if he wishes. The value of the exercise of the call option generally corresponds to the residual value.

The latter is also widely used in the insurance sector since compensation is based on the residual value of the asset. In other words, if your refrigerator, purchased 5 years earlier, is drowned following a flood, the insurance will compensate you on the basis of the residual value of the property, ie the value before the disaster. It will therefore apply a depreciation rate to the purchase price of your refrigerator that is supposed to correspond to the years of use.