Present Value Interest Factor (PVIF) definition


What is Present Value Interest Factor (PVIF)?

Present Value Interest Factor (PVIF) is a formula used to estimate the current value of a sum of money to be received at a future date. PVIFs are often presented in the form of a table of values ​​for different time periods and interest rate combinations.

The formula for the present value interest factor is














P


v


I


f


=




a




(


1


+


right



)


n



















Where:
















a


=


The amount to be received in the future
















right


=


The discount rate








begin{aligned} &PVIF = frac{a}{(1 + r)^{n}} &textbf{where:} &a=text{The future sum to get} &r= text{The discount rate} &n=text{The number of years or some other period} end{aligned}



PvIf=(1+right)naWhere:a=The amount to be received in the futureright=The discount rate

Understand the PVIF

The present value interest factor is based on the financial concept of the time value of money. That is, a sum of money today is worth more than the same sum in the future because money has the potential to increase in value over a period of time. If money earns interest, any amount of money is worth more the earlier it is received.

Present value interest factors are often used when analyzing annuities. The present value interest factor of an annuity (PVIFA) is helpful in deciding whether to accept a lump sum payment now or an annuity payment in the future. Estimated returns allow you to compare the value of annuity payments to principal.

The present value interest factor may only be calculated if the annuity payments are at a predetermined level over a predetermined period of time.

The central theses

  • Present value interest factors (PVIFs) are used to simplify a calculation of the time value of a sum of money payable in the future.
  • Present value interest factors are commonly used when analyzing annuities.
  • Present value interest factors are available in tabular form.

Example of the PVIF

Here’s an example of how the PVIF is used to calculate the present value of a future sum: Suppose a person receives $10,000 five years from now and the current rebate interest rate is 5%. Using the formula to calculate the PVIF, the calculation would be $10,000 / (1 + 0.05)^5. The resulting PVIF value from the calculation is $7,835.26.

The present value of the future amount is then determined by subtracting the PVIF number from the total future amount to be received. Thus, the present value of the $10,000 to be received five years in the future would be $10,000 – $7,835.26 = $2,164.74.

A PVIF can be calculated for an annuity payment only if the payment is for a predetermined amount and time period.

PVIF tables often provide a fractional number to multiply a specific future total using the formula above, which gives the PVIF for a dollar. Then the present value of any future dollar amount can be calculated by multiplying each specified amount by the reciprocal of the PVIF number.

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