How do different residual assumptions affect the lease rate quotation?
The economic yields to the lessor depend upon (1) the lessor’s cost of funds, (2) residuals realized, and (3) tax benefits of ownership. The lessor’s cost of funds is largely a function of your credit quality and not the lessor’s. In most cases, tax benefits arent that great, but late in the tax year they can sometimes make a significant difference in the quotes you receive for certain asset classes. Obviously, the biggest variable is residuals. In the example several paragraphs above, with 36 monthly payments at 2.84% of the initial asset cost, the lease payment could be lowered to 2.63% if a lessor was willing to assume a 25% residual (rather than the 15% used in the example). This represents a significant cash flow savings each month for the lessee.
