Question

Does the cash flow resulting from disposition of the asset at the end of a projects life (the residual value) have more risk or less risk than the actual lease payments?

And at what cost of money (or rate) do you bring the residual value back to present?

Answer 1

Cash flow resulting from this disposition at the end of project life is also the terminal value of the project and it has a lesser cost associated with it than actual lease payments.

It is the cost of the assets which has completely been depreciated over its economic life and it is only left with the residual value to be realised with.So the cash flow from the termination is not that substantial, as the lease payment but yes it is risky because one cannot forecast The terminal value in advance.

Residual cost should be brought at the present value at the end of the project life so it would be discounted with the last stream of the cash flow associated with the project.