What Is the Present Value Interest Factor (PVIF)?
What Is Present Value Interest Factor (PVIF)?
The present value interest factor (PVIF) is a formula used to estimate the present value of money to be received at some future date. PVIFs are often presented in tabular form with values for different time periods and interest rate groups.
The present value interest factor is based on the key financial concept of the time value of money. That is, money today is worth more than the same amount it will be in the future, because money has the potential to increase in value over a period of time. The amount given can earn interest so the sooner we get any amount of money, the higher its value.
The present value annuity interest factor (PVIFA) is useful when deciding whether to pay a lump sum now or accept annuity payments in future periods. Using estimated rates of return, you can compare the value of your annuity payments to a lump sum.
The present value interest factor can only be calculated if the annual payments of a predetermined amount are spread over a specified period of time.
Present value interest factors (PVIFs) are used to simplify the calculation of the time value of future payments.
Present value interest factors are commonly used in the analysis of annuities.
The present value factors of interest are available in tabular form for your reference.
An Example of a PVIF
Here is an example of how PVIF can be used to calculate the present value of future money: Suppose an individual will have $10,000 five years from now, and the current discount rate of interest is 5%. Using the formula to calculate the PVIF, the calculation would be $10,000 / (1 + .05)^5. The resulting PVIF 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 amount received in the future. Thus, the present value of $10,000 received five years in the future would be $10,000 – $7,835.26 = $2,164.74.
PVIF can only be calculated for annuity payments if the payment is for a predetermined amount and for a specific period of time.
PVIF tables often provide a fractional number for multiplying a specified future amount using the above formula, which results in a PVIF per dollar. Then the present value of any future dollar amount can be calculated by multiplying any given amount by the inverse of the PVIF number.