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1 March 1978 Financial Analysts Journal Volume 34, Issue 2

The Cost of Leasing: Inflation and Residual Value

  1. Robert P. Marcus

In order to avail himself of the tax benefits of ownership, a lessor must be able to prove to the IRS that he has a true ownership interest in the assets under lease. In general, he must retain for his own account several years of the expected value of the life of the asset, and no less than 15 per cent of its original value.

The so-called “residual value” that results has implications for the lessee. In particular, it has a real cash effect that the lessee cannot afford to ignore. Whether he purchases the asset at the end of the lease, or allows it to pass into the hands of the lessor, he is giving up valuable consideration. Since the advent of high rates of inflation, residual value has become more important than ever. The author supplies charts for reckoning the effective pre-tax rates of return corresponding to a wide range of residual values.

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