"Residual Risk and the Valuation of
Leases under Uncertainty and Limited
David C. Rode, Paul S. Fischbeck, and Steve R.
For a variety of tax, accounting, and economic reasons, leasing has become
an enormously popular method of financing the acquisition of capital assets.
In particular, for power generation assets, the use of leasing products
(including synthetic and leveraged leases) has grown substantially in recent
years. However, the long-lived nature of most power generation assets,
together with their often unique physical and economic characteristics, makes
estimation of their residual values challenging. In an environment where
uncertainties are commonplace and in which capital structures are often highly
leveraged, even small changes in residual values can have a significant impact
on the profitability of financial institutions and other investors. This
article outlines a framework for analyzing the uncertainty in residual values
for assets, such as power generation facilities, for which few data points
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