Why is residual value important in lease financing?

Residual value holds significant importance in lease financing as it directly influences several key factors, including the calculation of lease payments and the decisions made by lessees.

The residual value is the estimated worth of the asset at the end of the lease term. It plays a crucial role in determining the total lease payment. When the residual value is higher, it means that the depreciation of the asset is less significant in the calculations, often leading to lower monthly lease payments for the lessee. Conversely, if the residual value is low, the asset's depreciation over the lease term will be higher, resulting in increased payments. Thus, the residual value can make leasing more or less attractive to potential lessees, impacting their decision on whether to enter into a lease agreement.

Moreover, a clear understanding of the residual value assists lessees in making informed choices regarding asset types and lease structures, as it informs them about potential end-of-lease outcomes regarding ownership or asset return.

In contrast, the other options do not accurately capture the primary significance of residual value in this context. While the current market price of an asset refers to its value at a specific moment, this is not the same as residual value, which is an estimate at lease-end. The payment