Residual Value Setting and Testing

Leasing Company (LC) Residual Value Setting and Testing

Brief Overview

Every leasing company writing operating leases runs the risk that the asset will not be worth the residual when sold. Even capital leases can have risk if the client has the right to return the equipment without further charge at the end of the lease. As a result, the setting of residual values is extremely important in the pricing of a lease.

 

Situation

LC was in the business of leasing equipment and wanted to expand its line of equipment but the company did not have any residual experience with the new equipment. They also needed an efficient method of distributing the guide to its equipment dealers.

 

 

Why Goff Associates, Inc. (GAI)?

GAI has substantial experience in equipment leasing including residual setting, product development, pricing and analysis.

 

Results

GAI analyzed the companies providing equipment residual values guides and identified one that had a nationwide scope. GAI then performed an analysis of the guide’s performance and determined that it had a slight bias.

 

GAI negotiated an agreement to have the residual guides produced in LC’s name and distributed to their dealers. GAI established a process whereby annually LC would analyze the standard published residuals and determine if an adjustment needed to be made. Once the adjustment was determined, it would be applied to the standard residuals and then the special residual guides would be published and distributed to its dealers.

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