Impact of residual value in leasing decisions

Abstract

Scope and Method of Study: This study examines the effect changes in residual value estimates have on the lessor's desired rate of return. A questionnaire was distributed to a random sample of equipment lessors in which lessors were asked to rate the importance of residual value estimates to the lease decision. A sensitivity analysis was then performed to measure the theoretical effect residual value has on the lease decision. Comparisons were made between results obtained from the questionnaire and the sensitivity analysis.

Findings and Conclusions: The findings of the questionnaire revealed that there is much disagreement on the importance of residual value among lessors. The importance of residual value was dependent on the type of equipment being leased. The computer simulation revealed that the importance of residual value estimate has become less significant to the lease decision. This has been primarily due to the much higher rates of return required by lessors to maintain profitability levels above the inflation rate.