Residual value is a leasing method, which signifies the future value of an asset in terms of depreciation percentage of the asset's basic value. It is also termed as open or closed contracts.
Cost of a machine is Rs 5000 and its scrap rate is determined as 1000. Life span of the machine is estimated as 5 years.
Cost of the asset = 5000 Scrap rate = 1000 Machine's lifespan = 5 years
Residual Value = (Cost of fixed asset - Scrap rate) / Lifespan = 5000 - 1000 / 5 = 4000 / 5 = 800 Therefore, the residual value of the asset is '800'.