What is the purpose of estimating residual value?

• A. To set the monthly payment.
• B. To determine tax treatment.
• C. To calculate insurance premiums.
• D. To determine the value of the equipment at the end of the lease term.

Answer: (D)

Estimating residual value means forecasting what the equipment will be worth at the end of the lease. This end-of-lease value is the key input for determining how the lease is priced, since it sets the amount of depreciation the lessee effectively funds through the monthly payments. It also helps decide whether the lessee will have a purchase option or if the lessor will resell the asset, and it affects the lender’s risk. While the residual value can influence monthly payments, its primary purpose is to establish the equipment’s value at lease end, not tax treatment or insurance premiums.