What is the 'Present Value Interest Factor - PVIF'
The present value interest factor (PVIF) is a factor that is utilized to provide a simple calculation for determining the present value dollar amount of a sum of money to be received at some future point in time. For determination or consideration of a series of possible present values, PVIFs are often represented in the form of a table used for calculating the present value of a future sum with varying interest rate and time period combinations. The present value interest factor is based on the foundational financial concept of the time value of money, which states that the present value of a sum of money not to be received until sometime in the future must be discounted from the future amount according to a rate of return that could be earned on capital at the present time.
BREAKING DOWN 'Present Value Interest Factor - PVIF'
The formula for calculating the present value interest factor is as follows:
PVIF = a / (1 + r) ^ n
The "a" represents the future sum to be received, "r" represents the discount interest rate, and "n" represents the number of years or other time period.
PVIF Calculation and PVIF Tables
Here is an example of calculating the PVIF and determining the present value of a future sum: Assume an individual is going to receive $10,000 five years from now, and that the current discount interest rate is 5%. Using the formula for calculating the PVIF, the calculation would be $10,000 / (1 + .05) ^ 5. The resulting PVIF figure from the calculation is $1904.76. The present value of the future sum is then determined by subtracting the PVIF figure from the total future sum to be received. Thus, the present value of the $10,000 to be received five years in the future would be $10,000 - $1904.76 = $8,095.24.
PVIF tables often provide a fractional number to multiply a specified future sum by using the formula 1 / (1 +r) ^ n, which yields the PVIF for one dollar. Then the present value of any future dollar amount can be figured by multiplying any specified amount by the inverse of the PVIF number.
The PVIF and the Time Value of Money
The PVIF, which is used to calculate the present value of a future sum of money, can be seen as the flip side of the coin from calculating the future value of a present sum of money. Both ideas are derived from the concept of the time value of money.