Final answer:
Residual value is subtracted from the present value of minimum periodic payments when calculating a lease payment.
Step-by-step explanation:
Residual value is a term used in the leasing industry to represent the estimated value of an asset at the end of a lease term. In the context of a lessor, the residual value is always subtracted from the present value (PV) of minimum periodic payments when calculating the lease payment.
For example, let's say a car lease has a minimum periodic payment of $300 per month. The lessor estimates that the car will have a residual value of $5,000 at the end of the lease term. To calculate the lease payment, the lessor would subtract $5,000 from the present value of the $300 monthly payments.
It's important for lessors to accurately estimate the residual value as it affects the lease payment amount and potential profit or loss.