What is meant by "capital recovery" in leasing?

Capital recovery in leasing refers to the process through which a lessor recoups the initial investment made in acquiring the leased asset. This is accomplished through the receipt of lease payments from the lessee over the term of the lease. These payments not only help to recover the cost of the asset but may also include a return on investment, allowing the lessor to achieve financial viability and profitability from the leasing arrangement.

Choosing the correct understanding of capital recovery is crucial, as it is central to the financial structure of leasing. The lessor essentially seeks to recover the purchase price of the asset plus any associated costs, such as maintenance, insurance, and financing costs, enhancing the appeal of leasing as a financial option both for lessors and lessees.

The other options presented, while relevant to aspects of leasing, do not encapsulate the essence of capital recovery. Depreciation is related but is a measure of asset value decline rather than investment recovery. Risk assessment methods focus on evaluating financial stability and default likelihood, but they do not directly pertain to the concept of recovering capital. Future asset value calculations involve projecting future worth but do not address how the initial investment is recouped through lease agreements.